THE  LIBRARY 

OF 

THE  UNIVERSITY 

OF  CALIFORNIA 

LOS  ANGELES 


FINANCING 

AN 

ENTERPRISE 

A    Manual    of    Information    and    Suggestion 

for     Promoters,     Investors,     and 

Business    Men    Generally 

BY 

Francis  Cooper 


FOURTH  EDITION 


New  York 

The  Ronald  Press 

1915 


Copyright,  1906 

BY 

The  Ronald  Press  Company 


Copyright,  1907 

BY 

The  Ronald  Press  Company 


Copyright,  1909 

BY 

The  Ronald  Press  Company 


Copyright,  1915 

BY 

The  Ronald  Press  Company 


t 

4-011 

Cnf 


PREFACE 


The  principles  of  finance  do  not  change,  but  their 
apphcation  does.  Also,  illustrations  fall  behind  and 
must  be  replaced.  For  this  reason,  ihe  aullKjr  has 
taken  advantage  of  the  present  opportunity  to  make 
such  changes  as  will  adapt  the  book  to  present  condi- 
tions. 

As  to  the  purpose  of  the  present  work,  the  author 
cannot  express  it  better  than  in  the  following  Cjuota- 
tion  from  the  preface  of  the  first  edition : 

"Speaking  generally  it  should  be  possible  to  finance 
any  good  enterprise.  As  a  matter  of  fact  numerous 
enterprises  are  financed  that  cannot  be  designated  good. 
Still  further,  many  enterprises  are  financed  that  are 
not  only  bad  but  absolutely  fraudulent.  Failures  to 
finance  enterprises  are.  however,  frequent,  even  when 
the  enterprises  have  real  merit  and  the  general  con- 
ditions are  favorable.  Such  failures  can  only  be 
ascribed  to  a  disregard  or  ignorance  of  the  principles 
and  procedure  of  successful  financing.  The  object  of 
the  present  work  is  to  set  forth  these  principles  as 
clearly  as  may  be,  to  point  out  the  common  mistakes, 
to  suggest  the  best  methods  of  procedure  and  to  serve 
generally  as  a  manual  of  information. 

"The  scoi:)e  of  the  work  extends  beyond  the  direct 
financing  of  an  enterprise,  including  its  investigation, 
valuation,  preparation  and  presentation,  and  its  protec- 
tion meanwhile ;  also  a  discussion  of  the  somewhat 
difficult  matter  of  capitalization,  with  suggestions  as 


630351 


11  PREFACE. 

to  the  use  and  adaptation  of  the  corporate  form,  and 
a  consideration  of  promoters,  of  the  various  devices 
used  in  promotion,  and  of  other  related  matters. 

"Also,  as  the  effective  presentation  and  successful 
financing  of  an  enterprise  are  not  usually  possible 
unless  the  point  of  view — often  widely  divergent — of 
both  the  man  with  the  enterprise  and  the  man  with 
the  money  are  known  and  given  due  weight,  the  present 
volume  treats  its  subject  as  far  as  possible  from  the 
standpoint  of  both  parties. 

"It  may  be  said  that  the  statements,  comments  and 
suggestions  of  the  present  volume  are  based  on  an  ex- 
perience of  some  fifteen  years  in  legal  work  connected 
more  or  less  directly  with  the  financing  of  enterprises. 
The  author  can  only  hope  that  these  gleanings  from 
experience  will  be  helpful  to  those  into  whose  hands 
the  volume  may  come,  and  save  some  of  his  readers  at 
least  from  the  expensive  and  often  disastrous  mistakes 
so  common  when  enterprises  are  to  be  financed." 

It  may  also  be  said  that  the  general  purpose  of  the 
book  is  to  assist  in  honest  promotion.  It  has  no  sym- 
pathy and  nothing  in  common  with  the  get-rich-quick 
artist,  or  with  those  who  seek  to  unload  worthless,  or 
over-capitalized  offerings  on  unwary  or  ignorant  in- 
vestors. 

The  author  takes  pleasure  in  expressing  his  very 
sincere  appreciation  of  the  friendly  reception  accorded 
the  preceding  editions  of  his  book.  Its  sale, extending 
to  every  civilized  country  of  the  world,  is  a  practical 
tribute  to  its  worth  that  cannot  be  but  gratifying  to 
the  author. 

Francis  Cooper. 
New  York  City, 
March  t,  191 5. 


TABLE  OF  CONTENTS. 


PART  I.     THE  ENTERPRISE. 
Chapter.  Page. 

I.     Introductory 5 

II.     Conditions  of  Financing 8 

III.  Methods  of  Financing 14 

IV.  Requisites  of  a  Successful  Enterprise 27 

V.  Relative  Status  of  the  Undertaking,  Capital  and 

Management 41 

PART  II.     INVESTIGATION  OF  AN  ENTERPRISE. 

VI.  Importance  of  Investigation 48 

VII.  Methods  and  Results  of  Investigation 59 

VIII.  Speculative  and  Non-Speculative  Enterprises.  ...  66 

IX.  Investigation  of  a  Non-Speculative  Enterprise.  .  .  75 

X.  Investigation  of  a  Speculative  Enterprise 93 

XI.  Experimental  Work  and  Model-Making 109 

PART  III.     PROTECTION  OF  AN  ENTERPRISE. 

XII.  Patents 118 

XIII.  Trade-Marks,  Trade-Names  and  Copyrights 131 

XIV.  Secret  Processes 143 

XV.  Monopolies 149 

PART  IV.     CAPITALIZATION  OF  AN  ENTERPRISE. 

X\'I.     Capitalization,     i.egal  Status.     Functions 163 

XVII.     The  Basis  of  Capitalization 174 

XVIII.     Capitalization  Not  Based  on  Value 184 

XIX.     Capitalization    Based    on    Present    V'alues.     New 

Enterprises 191 

XX.     Capitalization  Based  on  Present  Values.     Going 

Concerns.     Good-Will 207 

XXI.     Capitalization  Based  on  Profit  Probabilities 222 

XXII.     Capitalization  Based  on  Profit  Possibilities 233 

XXIII.     Excessive  Capitalization 241 

iii 


TABLE    OF    CONTEXTS. 


PART  V.     PRESENTATION  OF  AN  ENTERPRISE. 

Chapter.  Page. 

XXIV.     Manner  and  Matter  of  Presentation 253 

XXV.     Preparation  for  Presentation 265 

XXVI.     The  Prospectus  and  Other  Papers 278 

XXVII.        "  "      (Continued)...    291 

XXVIII.     The  Presentation.     Private  or  PubHc 303 

XXIX.     Private  Presentation.     Among  F>iends 314 

XXX.  "  "  "        Strangers 329 

XXXI.  "                  "                      "               "         (Con.).  .    341 

XXXII.     Public  Presentation.     By  Circular  Letters 360 

XXXIII.  "  "                 Newspaper   and    Magazine 
Advertising 376 

XXXIV.  Public  Presentation.     Newspaper   and    Magazine 

Advertising  (Continued) 389 

PART  VI.     SPECIAL  FEATURES  OF  PROMOTION. 

XXXV.     Trust  Fund  Guarantees 404 

XXXVI.     Guaranteed  Stock,  Bonds  and  Dividends 414 

XXXVII.     Underwriting 430 

XXXVIII.  "Promoters"  and  "F"inancicrs" 441 

XXXIX.     Commissions  and  Bonuses 462 

XL.     Legal  Assistance 474 

XLI.     Adaptation  of  Corporate  Features 484 

APPENDIX. 
XLII.     The  Investor's  Questions 503 


FINANCING  AN   ENTERPRISE. 


PART  I.— THE   ENTERPRISE. 


CHAPTER  I. 
INTRODUCTORY, 


An  enterprise,  as  contemplated  by  the  present  work, 
is  any  undertaking  that  may  be  financed.  It  may  be 
an  invention,  a  mine,  a  business,  a  combination,  a 
consolidation,  or  any  other  form  of  commercial  ac- 
tivity. It  may  be  a  development  proposition,  it  may 
be  a  going  concern,  or  it  may  be  something  merely 
demanding  liquidation.  If  there  is  a  proposition  on 
one  side,  seeking  money  for  its  purposes  from  the 
other  side,  it  is  an  enterprise  as  here  considered. 

As  to  what  enterprises  can  be  financed,  it  may  be 
said  broadly  that  money  may  be  raised  for  anything 
capable  of  being  utilized  for  purposes  of  profit,  or 
which  men  with  money  may  be  led  to  think  can  be 
so  utilized.  The  nature  of  the  enterprise — ethical  con- 
siderations apart — is  of  minor  importance,  its  success- 
ful financing  whether  for  its  own  operations  or  for  the 


6  FINANCING    AN    ENTERPRISE. 

benefit  of  its  promoters,  being  mainly  a  matter  of 
preparation  and  presentation.  In  the  author's  recent 
knowledge,  an  invention,  untried,  unpatented,  and  ex- 
isting mainly  on  paper,  secured  financial  support  in 
cash  to  the  extent  of  nearly  $40,000.  Further,  a  large 
portion  of  this  amount  was  placed  in  the  inventor's 
hands  without  restriction  of  any  kind,  and  all  this  was 
done  solely  on  the  unsupported  statements  of  this 
same  inventor  as  to  the  value  and  conditions  of  his 
invention.  In  this  case  the  man  presenting  the  enter- 
prise honestly  believed  the  statements  he  made,  but 
this  belief,  as  shown  by  results,  was  purely  a  matter 
of  faith — not  of  works. 

Nor  is  this  an  exceptional  case.  It  is  a  matter  of 
common  observation  that  investors  will,  if  properly 
encouraged  thereto,  lend  their  financial  assistance  just 
as  freely  and  even  more  cheerfully  to  some  impossible 
scheme  for  the  extraction  of  gold  from  the  waters  of 
the  sea,  or  to  the  development  of  some  remote  or  even 
non-existent  mine,  as  to  the  establishment  of  some 
solid  industry  in  their  midst. 

It  is  true  that  the  promotion  of  illusive  schemes 
such  as  those  referred  to,  sometimes  brings  the  pro- 
moter's career  to  an  abrupt  termination  in  the  peni- 
tentiary, and  for  this  and  other  reasons  should  be 
deprecated.  The  methods  adopted  in  the  presentation 
of  such  swindling  enterprises,  however,  evince  much 
knowledge  of  human  nature,  are  often  good,  and 
should  be  noted  and  applied,  as  far  as  may  properly  be 
done,  in  the  promotion  of  honest  undertakings. 
"Beauty  unadorned"  is  not  usually  appreciated  in  the 


INTRODUCTORY.  7 

presentment  of  an  enterprise.  A  bald  statement  of 
the  facts  without  comment  or  elaboration  may,  if  the 
facts  are  sufficiently  good  and  the  men  behind  the  en- 
terprise are  financially  strong,  be  effective  and  the  best 
presentation  that  could  be  made.  Usually,  however, 
an  enterprise  so  presented  gets  no  further  than  its 
presentation.  Something  more  attractive  is  needed  if 
it  is  to  be  financed. 

Just  how  far  verbal  gilding  may  be  carried  in  pro- 
motion without  overstepping  the  bounds  between  legi- 
timate statement  and  false  representation,  is  perhaps 
open  to  debate.*  There  is,  however,  no  question 
that  an  enterprise  to  be  financed  may  be  made  or 
marred  by  the  manner  and  conditions  of  its  presen- 
tation. 


*See  ChaDter  XXIV, 


CHAPTER  II. 
CONDITIONS  OF  FINANCING. 


To  the  inexperienced,  the  financing  of  an  enterprise 
does  not  seem  difficult.  Indeed  to  those  unfamiHar 
with  the  state  of  the  "industry,"  it  appears  quite  as 
difficult  to  secure  a  good  enterprise  as  to  secure  the 
funds  for  its  flotation.  There  is  money  a-plenty  in 
the  world  for  all  that  is  to  be  done.  It  cannot  be  left 
idle ;  it  must  go  into  something,  and  therefore,  if  one 
has  a  meritorious  enterprise  it  should  not  be  more 
difficult  to  sell  an  interest  in  it  than  to  sell  any  other 
possession  of  material  value.  That  this  is  not  an  un- 
common impression  is  shown  by  the  constant  enquiry, 
in  entire  good  faith,  for  reliable  houses  engaged  in 
the  work  of  financing  enterprises — concerns  through 
which  the  man  with  a  good  undertaking  may  finance 
his  enterprise  just  as  he  would  rent  a  house  through  a 
real  estate  agent,  or  sell  his  crops  through  a  commis- 
sion merchant. 

Theoretically  this  should  be  so.  Practically  it  is 
not.  As  a  matter  of  fact,  enterprises,  even  though 
good,  are  ordinarily  floated  with  difficulty,  and  while 
houses  undoubtedly  do  exist  for  the  announced  pur- 
pose of  financing  enterprises,  they  are,  as  a  rule,  far 
more  active  and  successful  in  securing  money  from 
their  clients  than  for  them. 

8 


CONDITIONS    OF    FINANCING.  9 

For  this  failure  of  theory,  the  very  unfortunate 
conditions  under  which  enterprises  are  usually  present- 
ed must  be  held  responsible.  That  this  is  true  is  shown 
by  the  ease  with  which  an  enterprise  is  financed  when 
the  conditions  are  favorable.  Thus  a  successful  busi- 
ness man  of  proved  integrity  takes  up  some  new  en- 
terprise, looks  into  it  carefully  and  then  with  a  sound 
and  well-matured  plan  of  operation,  invests  his  own 
money  in  it  and  invites  his  business  associates  to  do 
the  same.  If  the  enterprise  is  suitable  and  the  time 
is  right,  he  will  dispose  of  this  offered  interest  with 
ease — much  more  readily  than  he  could  negotiate  the 
sale  of  his  house  or  find  a  purchaser  for  a  surplus 
stock  of  goods. 

It  is  comparatively  seldom,  however,  that  such  con- 
ditions obtain.  Successful  business  men,  as  a  rule,  are 
very  fully  occupied  with  their  own  pursuits.  They  are 
not  neglecting  their  regular  avocations  for  the  dis- 
covery of  new  lines  of  industry,  nor  are  they  devoting 
restless  nights  to  the  invention  of  novel  mechanisms. 
They  are  already  profitably  busy  and  usually  only  take 
up  such  enterprises  as  come  to  them  incidentally  or  in 
the  course  of  business. 

For  this  reason  perhaps  a  majority  of  the  enterprises 
brought  forward  are  in  the  hands  of  young  or  inex- 
perienced men,  overly  enthusiastic  and  sadly  lacking 
in  judgment;  of  inventors,  often  mentally  loose-jointed 
and  widely  impracticable;  of  unsuccessful  business  men 
warped  by  their  reverses  and  snatching  at  straws ;  of 
adventurers  without  money  or  reputation  and  anxious 


lO  FINANCING   AN    ENTERPRISE. 

only  to  turn  a  penny  without  regard  to  the  means 
employed. 

Add  to  this  the  further  facts  that  men  are  too  fre- 
quently but  "indififerent  honest"  and,  speaking  gener- 
ally, too  anxious  for  the  success  of  their  particular 
undertakings  to  be  overly  exact  in  their  representa- 
tions; that  too  often  their  offerings  are  doubtful,  de- 
fective or  even  impossible  undertakings,  "touched  up" 
to  appear  as  golden  opportunities ;  that  their  terms  are 
apt  to  be  as  remarkable  as  their  offerings,  not  uncom- 
monly requiring  that  the  proposed  capitalistic  victim 
shall  put  in  all  of  the  necessary  funds,  take  a  small  in- 
terest in  return  and  leave  to  the  promoters  the  control 
of  both  enterprise  and  money, — take  all  this  into  con- 
sideration, and  the  hesitation  of  the  man  with  money 
even  to  investigate,  much  less  embark  in  "unaccredit- 
ed" enterprises,  may  be  readily  understood. 

All  this  misrepresentation,  chicanery  and  extrava- 
gance of  statement  and  demand,  reacts  to  the  very 
great  injury  and  disadvantage  of  legitimate  proposi- 
tions. It  explains  much  of  the  difficulty  of  financing 
and  should  be  very  clearly  understood  by  the  man  who 
has  an  enterprise  to  present.  It  also  partially  explains 
the  suspicions,  exactions  and  often  most  unreasonable 
demands  of  the  men  with  money. 

Indeed,  it  may  be  said  in  defense  of  the  capitalist, 
that  while  he  very  frequently  does  take  advantage  of 
the  ignorant,  the  unsuspicious  or  necessitous  inventor 
or  owner,  he  is  at  least  as  much  sinned  against  as 
sinning,  and  that  for  every  man  with  an  enterprise 
who  has  been  hardly  treated  or  "frozen  out"  by   his 


CONDITIONS    OF    FINANCING.  II 

financial  backers,  it  would  be  possible  to  discover  a 
hundred  men  with  money  who  have  been  drawn  into 
unprofitable  or  impossible  undertakings  by  misrepre- 
sentation or  by  even  more  flagrant  fraud. 

To  turn  from  the  standpoint  of  the  promoter  to  that 
of  the  investor,  it  may  be  said  that  the  profitable  in- 
vestment of  money  is  usually  a  matter  of  real  and 
serious  difficulty.  In  the  East,  savings  banks  offer 
from  3%  to  4%  ;  first-class  city  real  estate  mortgages 
pay  from  4%  to  5%  ;  the  usual  good  bonds  and  gilt- 
edged  stocks  about  the  same;  Government  bonds  con- 
siderably less.  All  these  are  reasonably  safe  but  are 
not  large  revenue  bringers. 

If  better  rates  are  desired,  not  only  must  a  certain 
added  risk  be  taken,  but  even  with  this  drawback  good 
investments  are  not  abundant.  Established  enterprises, 
as  a  rule,  offer  but  little  more  for  money  than  the 
prevailing  interest  rates.  If,  then,  a  materially  larger 
rate  of  profit  is  desired,  investment  in  some  undevelop- 
ed or  speculative  enterprise  is  usually  the  only  re- 
source. For  this  reason,  if  a  man  has  money  to  invest, 
he  is  rarely  so  occupied,  so  indifferent,  or  so  difficult 
of  access,  that  the  right  kind  of  enterprise,  properly 
presented,  will  not  command  his  attention.  Whether 
it  will  secure  his  money  depends  upon  the  ability  of 
its  presentation  and  the  strength  of  its  attraction  for 
him. 

Opportunities  for  more  or  less  speculative  invest- 
ments are  offered  him  in  abundance,  but  the  majority 
of  these  are  as  risky  as  they  are — according  to  the 
statements    of    their     promoters — profitable.     Under 


12  FINANCING    AN    ENTERPRISE. 

these  circumstances,  if  the  man  with  a  really  good 
enterprise  and  a  fair  proposition  can  get  at  people  with 
money  and  convince  them  that  his  enterprise  is  good, 
that — if  the  enterprise  is  to  be  under  his  control — he 
is  capable  of  its  successful  management,  that  his 
standing  and  integrity  are  such  as  to  justify  their 
trust,  and  that  the  returns  to  be  reasonably  expected 
are  sufficient  to  justify  the  business  risk  involved,  he 
will  have  no  trouble  in  securing  all  the  money  re- 
quired. 

Of  all  these  requisites  a  reputation  for  success  and 
for  honesty  is  perhaps  the  most  important.  The  ma- 
jority of  investors  cannot  take  the  time  or  go  to  the 
trouble  and  expense  of  making  a  proper  investigation 
of  an  offered  enterprise,  even  were  they  capable  of 
doing  so.  Neither  are  they  able,  after  investment,  to 
supervise  their  interests  so  closely  as  to  protect  them- 
selves properly  against  either  dishonest  or  inefficient 
management.  This  being  true,  the  average  man  and 
woman  would  rather  entrust  their  investments  to  one 
in  whose  honesty  and  ability  they  have  confidence, 
merely  on  the  strength  of  his  statements,  than  to  a 
stranger,  or  to  a  man  of  doubtful  integrity  or  un- 
known ability,  even  after  the  most  searching  investi- 
gation of  which  they  are  capable. 

It  must  be  confessed  that  there  are  numerous  start- 
ling and  most  remarkable  exceptions  to  this  general 
rule — cases  where  men  give  up  the  savings  of  years 
to  persuasive  strangers  of  whom  they  never  heard 
before  and  of  whom  very  fre(juently  they  never  hear 
after;  gold  bricks  are  purcliased  freely  not  only  in  the 


CONDITIONS    OF    FINANCING.  I3 

rural  neighborhoods,  but  right  in  the  city  of  New 
York;  extravagant  and  widely  advertised  enterprises 
continue  to  reap  opulent  returns  from  subscribers,  if 
not  from  dividends ;  the  Keely  motor  is  not  yet  for- 
gotten by  its  confiding  supporters,  and  the  enumera- 
tion might  be  continued  indefinitely  and  most  unpro- 
fitably. 

These  things  are,  however,  abnormal.  They  are 
the  "sports"  of  the  financial  world,  and,  while  they 
are  not  uncommon,  the  ordinary  man  can  hardly  ex- 
pect, and  the  honest  man  would  not  wish,  to  profit  by 
anything  of  the  kind.  On  the  contrary,  and  especially 
when  engaged  in  promoting,  honesty,  properly  forti- 
fied by  ability  and  a  knowledge  of  business  procedure, 
must  still  continue  to  be  the  best  policy,  and  it  is  on 
the  uninflated  and  solid  basis  of  good  reputation  and 
fair  representations  that  the  best  financing  is  and  must 
be  done. 

In  conclusion  it  may  be  said  that  the  ideal  condi- 
tions for  the  financing  of  an  enterprise  involve  a 
good  proposition,  well  presented  at  the  right  time  to 
people  who  have  money  to  invest,  by  a  man  who  com- 
mands their  business  and  personal  confidence.  Under 
such  conditions  the  financing  of  an  enterprise  is  easy. 
The  more  widely  these  conditions  are  departed  from, 
in  whole  or  in  part,  the  more  difficult  the  matter  be- 
comes. The  great  secret  of  successful  financing  is 
then  to  approximate  these  ideal  conditions — in  fact 
or  in  appearance — as  closely  as  the  actual  conditions 
will  permit. 


CHAPTER  III. 
METHODS  OF  FINANCING. 


The  usual  method  of  financing  an  enterprise,  and 
the  one  discussed  at  length  in  the  present  volume,  is 
that  of  interesting  moneyed  men.  Other  methods  are, 
however,  followed  on  occasion.  The  simplest  of  these 
is  found  when  the  owner  or  promoter  has  the  means, 
and  himself  invests  the  money  needed  for  his  enter- 
prise. Aluch  difficulty  is  avoided  by  the  adoption  of 
this  plan,  but  unfortunately  it  is  not  generally  prac- 
ticable. 

Next  to  this  method  comes  the  good  old  plan  of 
gradual  development — the  actual  building  up  of  the 
enterprise  from  the  financial  materials  at  hand,  these 
materials  being  at  first  perhaps  the  accumulated  means 
of  the  parties,  then  returns  from  the  operations  of  the 
enterprise  itself,  or  funds  secured  from  some  other 
occupation  or  business  while  the  enterprise  is  in  course 
of  building,  or  a  combination  of  any  two  or  all  of 
these. 

This  method  is  absolutely  inapplicable  to  the  de- 
velopment of  those  very  numerous  enterprises  where 
large  purchases,  investments  or  installations  are  an 
essential  preliminary.  There  are  other  cases  in  which 
it  is  entirely  inadvisable  because  of  the  slowness  of  the 
process,  as  in  the  development  of  a  patent  with  but  a 

14 


METHODS    OF    FINANCING.  I5 

limited  period  to  run,  the  building  up  of  a  business 
where  competition  may  only  be  overcome  or  prevented 
by  quick  and  brilliant  success,  and  the  many  other 
cases  where  time  is  the  "essence"  of  the  undertaking. 

Where  this  development  plan  is  applicable  and  ad- 
visable, it  is  ideal.  It  avoids  the  risks,  the  mistakes, 
the  expensive  experiments,  and  the  premature  develop- 
ment more  or  less  characteristic  of  all  "financed"  en- 
terprises in  which  the  managers  are  inexperienced  or 
the  lines  of  business  new. 

It  is  the  step  by  step  method.  A  man  developing 
an  enterprise  in  this  way  is,  at  the  start,  working  on 
a  small  scale,  his  expenditures  are  necessarily  limited 
and  his  progress  is  unavoidably  slow.  His  experi- 
ments are,  as  a  matter  of  necessity,  cautious,  care- 
fully watched,  small  in  cost  and  quick  in  results, 
be  they  good  or  bad.  If  good,  the  particular  line 
of  effort  is  pushed;  if  bad,  abandoned  without  seri- 
ous loss  of  either  time  or  money.  In  either  case  the 
facts  of  the  particular  experiment  are  determined  in 
the  course,  perhaps,  of  a  few  weeks  and  at  the  cost 
of  a  few  dollars,  while  in  a  more  pretentious  venture 
the  same  results  would  be  demonstrated  no  more  satis- 
factorily at  a  cost  of  hundreds  or  even  thousands  of 
dollars  and  months  of  time. 

During  this  period  the  proprietor  is  going  through 
a  course  of  business  training,  from  which  he  secures 
a  grasp  of  the  business,  and  an  understanding  and 
control  of  its  every  feature  that  nothing  else  could 
give  so  thoroughly  and  satisfactorily.  As  a  result  of 
this  he  frequently  attains  a  degree  of  success  which 


16  FINANCING   AN    ENTERPRISE. 

would  hardly  be  possible  under  any  other  system  of 
development.  He  grows  into  prosperity  and  when  he 
reaches  it  he  is  so  firmly  rooted  and  grounded  at 
every  point  that  he  fears  neither  competitors  nor  the 
severest  industrial  storms. 

This  method  of  developing  an  enterprise  may  be 
said  to  be  the  primitive  and  natural  method.  Examples 
of  its  successful  application  are,  from  the  time  of  Dick 
Whittington  and  his  cat,  and  before,  numerous  and 
well  known,  and  are  the  basis  for  many  an  instructive 
discourse  of  more  or  less  dubious  soundness. 

A  striking  and  pleasant  illustration  of  this  method 
of  developing  an  enterprise,  is  found  in  the  Mary 
Elizabeth  Candy  shops.  But  little  more  than  ten 
years  ago,  Mary  Elizabeth  Evans,  a  girl  of  sixteen,  her 
widowed  mother  and  three  younger  children,  were 
living  on  their  grandfather's  farm  near  Syracuse,  New 
York.  The  death  of  their  grandfather  had  thrown 
them  on  their  own  resources,  and  the  problem  of 
money  for  clothes,  education,  and  the  many  other 
requirements  of  a  growing  family,  was  very  difficult. 
The  task  of  solving  the  problem  devolved  on  Mary 
Elizabeth. 

To  meet  this  situation,  Mary  Elizabeth  possessed 
two  esi>ecially  valuable  personal  qualifications,  neither 
as  yet  recognized  by  her  as  a  business  asset.  She  was 
a  Ijorn  can(l}'-maker  and  a  born  executive.  In  addi- 
tion, she  was  desperately  anxious  to  increase  the 
family  income.  But  what  to  do,  she  did  not  know. 
Her  attitude  was  one  of  "watchful  waiting." 

Her   opportunit}- — though    not    recognized    as    such 


METHODS    OF    FINANCING.  IJ 

at  the  time — came  in  the  form  of  a  house-party  given 
by  an  old  family  friend  in  Syracuse.  Mary  Eliza- 
beth wanted  to  help,  and  her  contribution  to  the 
pleasures  of  the  gathering  was  a  box  of  home-made 
candy,  sent  in  a  neat  box  and  labelled  with  the  now- 
familiar  legend,  "Mary  Elizabeth's  Candy."  The 
candy  made  a  "hit."  It  was  good,  it  was  attractive, 
it  was  different  from  anything  the  guests  had  tasted 
before,  and  inquiries  soon  drew  from  the  willing  host- 
ess its  story,  together  with  an  opinion  that  orders 
would  be  gladly  received.  The  guests  were  interesterl 
and  practically  every  one  of  them  put  in  an  order  for 
a  weekly  box  of  Mary  Elizabeth's  candy. 

This  was  the  starting-point  of  the  Mary  Elizabeth 
business.  The  candy  was  made  at  home  and  de- 
livered by  the  children,  collections  being  made  as  the 
candy  was  delivered.  The  little  trade  thus  established 
grew,  but  grew  slowly  because  of  the  difficulty  of 
making  "connection."  Possible  patrons  could  not 
be  expected  to  employ  a  detective  to  ferret  out  the 
source  of  supply.  Or,  even  if  they  knew  where  the 
candy  came  from,  it  was  difficult  for  them  to  place 
orders  and  Mary  Elizabeth  soon  saw  that  some  more 
effective  method  of  selling  and  distributing  was  essen- 
tial if  the  business  was  really  to  amount  to  anything. 

At  this  critical  time  it  was  suggested  to  Mary 
Elizal)eth  that  a  booth  could  be  rented  on  easy  terms 
in  the  Arcade  of  the  University  Building.  This 
would  give  a  central  and  desirable  location  in  Syra- 
cuse. The  rental  was  within  reach  and  the  opening 
attractive,  but  how  was  attendance  to  be  provided  for? 


l8  FINANCING   AN    ENTERPRISE. 

Mary  Elizabeth  herself,  had  the  candy-making  to  look 
after;  the  other  children  were  too  young;  a  paid  at- 
tendant was  beyond  their  means.  An  implicit  trust 
in  human  nature  finally  solved  the  problem.  The 
customers  mitst  serve  themselves. 

The  booth  was  rented,  neatly  fitted  up,  and  stocked 
with  an  attractive  display  of  candy,  every  box  plainly 
labelled  with  its  price.  An  open  cash-box  was  pro- 
vided and  suitable  signs  notified  the  passers-by  to  help 
themselves,  and  put  the  money  in  the  box.  Change 
to  the  amount  of  two  dollars  was  placed  in  the  cash 
box  for  the  convenience  of  customers  and  the  new 
venture  was  launched. 

The  success  of  the  "help  yourself"  booth  was 
immediate.  The  excellence  of  the  candy,  the  attrac- 
tiveness of  the  display,  the  entire  novelty  of  its 
method,  brought  a  liberal  and  increasing  patronage. 
The  contents  of  the  cash-box  sometimes  ran  up  as 
high  as  fifteen  dollars.  Customers,  neighboring  ten- 
ants and  even  the  newsboys  who  sold  papers  in  the 
Arcade,  vied  with  one  another  in  the  protection  of 
Mary  Elizabeth's  property,  and  the  promotion  of  her 
business. 

The  success  of  the  booth  soon  supplied  the  funds 
and  the  basis  for  a  larger  and  more  convenient  candy 
shop  located  near  the  Arcade.  This  store,  conducted 
on  the  same  principle  of  giving  value  received,  always 
meeting  the  demands  of  its  patrons,  of  being  a  little 
different  from  other  stores,  was  as  successful  on  a 
larger  scale  as  the  booth  had  been ;  and  from  that  time 
on  the  A'lary  Elizabeth  record  is  one  of  a  successful 
and  solf-fmancini''  undertakin"'. 


METHODS    OF    FINANCING.  I9 

At  the  present  time,  the  Mary  Elizabeth  business  is 
a  large  one.  Its  candy  stores  and  tea  rooms  are 
located  in  half  a  dozen  different  cities.  The  rental 
for  one  of  these  alone — the  Fifth  Avenue  store  in 
New  York  City — amounts  to  $45,000  a  year,  and  the 
annual  "turn-over"  of  the  various  establishments  runs 
far  up  in  the  hundreds  of  thousands  of  dollars.  Mary 
Elizabeth  is  still  at  the  head  of  the  establishment.  It 
is  still  conducted  on  the  same  general  lines  laid  down 
in  the  early  history  of  the  undertaking. 

By  way  of  contrast,  another  instance  known  to  the 
writer,  but  not  to  fame,  may  be  cited.  Some  years 
before  Mary  Elizabeth  made  her  start,  a  gentleman 
skilled  in  food  preparations,  discovered  a  new  and 
attractive  preparation  of  chocolate — a  soluble  choco- 
late, different  from  anything  else  on  the  market,  con- 
venient for  use  and  as  good  a  foundation  for  a  profit- 
able business  as  could  be  wished. 

The  inventor,  through  illness  and  attendant  business 
reverses,  was  unable  to  put  any  considerable  sum  of 
money  into  the  development  of  his  invention,  and  the 
question  as  to  how  it  should  be  handled  was  an  im- 
portant one. 

As  will  be  seen  the  enterprise  thus  opened  up  was 
one  that  lent  itself  admjrably  to  the  personal  develop- 
ment plan.  The  few  hundred  dollars  necessary  for 
a  modest  start  could  have  been  provided  by  the  owner 
himself;  the  expenses  could  have  been  met  by  the 
returns  from  the  business ;  it  would  have  been  readily 
self-sustaining  as  it  grew,  and  the  presumption  is  a 
fair   one   that   had   the   owner    followed    the   method 


20  FINANCING    AN    ENTERPRISE. 

of  self-development,  he  would  now  be  the  fortunate 
possessor  of  an  unusually  large  and  prosperous  busi- 
ness. 

The  inventor,  however,  instead  of  following  the 
lines  of  personal  development,  concluded  that  the 
enterprise  was  too  good  to  require  a  term  of  years  for 
its  upbuilding  and  that  it  could  and  should  be  financed 
by  some  speedier  and  easier  method.  After  due  delib- 
eration, he  decided  that  $100,000  was  needed  to  put 
the  preparation  properly  on  the  market  and  capi- 
talized the  enterprise  on  this  basis.  Then,  instead  of 
putting  in  his  time,  energy  and  money  as  before  to 
building  up  the  business,  he  devoted  himself  to  a  cam- 
paign for  development  money. 

The  results  were  most  unfortunate.  Begun  nearly 
fifteen  years  ago,  this  campaign  has  continued  up  to 
the  present,  and  the  end  is  not  yet.  The  time  has  been 
lost,  the  enterprise  and  its  owner  have  been  harassed 
by  a  steadily  growing  indebtedness,  other  similar 
preparations  have  appeared  on  the  market,  and  the 
inventor  is  now  apparently  no  nearer  the  realization 
of  his  hopes  than  he  was  at  the  beginning. 

It  is  but  fair  to  say,  however,  that  in  this  case  the 
inventor  lost  several  good  opportunities  of  financing 
his  undertaking,  through  the  unreasonable  nature  of 
his  demands;  also,  that  had  he  made  a  fair  proposition 
for  the  needed  capital  and  secured  it,  as  he  could  have 
done,  the  business  might  have  reached  substantial  suc- 
cess in  a  very  much  shorter  period  than  would  have 
been  possible  under  the  slow  process  of  personal 
development,    and    that    this    quicker    success    would 


METHODS    OF    FINANCING.  21 

probably  have  preserved  to  it  a  monopoly  that  is  now 
impossible. 

A  modification  of  the  personal  development  method 
sometimes  followed  with  excellent  results,  is  the  grad- 
ual upbuilding  of  a  new  enterprise  as  a  side  line. 
That  is,  the  owner,  already  occupied,  continues  in  the 
business  or  employment  in  which  he  is  engaged  and 
from  which  he  derives  at  least  a  support,  and  gives 
the  new  venture  such  time,  attention  and  money  as 
it  needs  or  as  he  can  spare  from  his  main  work. 

It  is  obvious  that  this  method  is  of  very  limited 
application.  The  conditions  that  permit  it  are  unusual. 
As  a  rule,  success  in  any  enterprise,  and  more  particu- 
larly a  new  enterprise,  requires  the  closest  and  most 
unremitting  personal  attention.  There  are,  however, 
undoubtedly  enterprises  that  can  be  worked  up  by  this 
method,  or  by  modifications  of  the  method,  and  at 
times  it  may  be  used  to  great  advantage. 

The  plan  is  sometimes  adopted  with  good  results 
where  two  parties  are  interested  in  an  enterprise,  the 
one  taking  charge  of  the  new  enterprise  and  the  other 
retaining  his  regular  employment  as  a  base  of  support, 
this  latter  giving  to  the  new  business  such  financial 
aid  and  personal  attention  as  he  may  find  possible. 
Then  when  the  new  enterprise  is  brought  to  the  point 
of  self-support,  the  "sustaining"  associate  withdraws 
from  his  regular  occupation  and  gives  his  entire  time 
and  attention  to  the  new  undertaking. 

Occasionally  this  plan  is  modified,  the  owner  em- 
ploying some  one  to  take  charge  of  the  new  enterprise 
while    he    continues    his    own    regular    work,    merely 


22  FINANCING   AN    ENTERPRISE. 

supervising  and  assisting  in  the  new  undertaking  as 
he  may  be  able,  until  some  better  arrangement  is  pos- 
sible. The  chief  obstacle  in  the  way  of  this  method 
lies  in  the  difficulty  of  securing  an  employee  of  suffi- 
cient honesty  and  ability  to  take  charge  of  the  new 
business. 

The  advantages  of  this  "side  line"  financing,  when 
it  is  practicable,  are  obvious.  In  a  new  enterprise  of 
limited  capital  there  is  almost  invariably  a  period  of 
harassing  uncertainty,  sometimes  quite  prolonged, 
when  the  income  is  exceeded  by  the  outgo  and  the  fu- 
ture of  the  whole  venture  trembles  in  the  balance.  If 
then  the  owner  is  meanwhile  profitably  employed  and 
able  to  supply  additional  funds  as  they  are  needed,  the 
danger  of  failure  is  largely  removed  and  the  very 
knowledge  that  the  "base  of  supplies"  is  not  in  danger 
is  in  itself  an  element  of  strength  and  of  success. 

On  the  other  hand,  the  development  of  a  new  en- 
terprise by  this  method  is  slow,  the  business  itself  is 
almost  certain  to  suffer  and  perhaps  fail  from  lack  of 
attention,  and,  finally,  it  may  be  said  that  in  practice 
most  of  these  side  line  attempts  are  failures. 

Another  method  of  financing  enterprises  sometimes 
employed  is  to  borrow  the  money  required.  This  is 
only  possible  where  the  personal  standing  or  the  col- 
lateral security  of  the  borrower  is  such  in  itself  as  to 
justify  the  loan,  as  it  is  seldom  that  the  enterprise 
itself  would  be  considered  security  for  the  money  need- 
ed for  its   development. 

If  the  enterprise  itself  is  good,  the  owner  or  the 
party  in  charge  a  good  manager,  and  a  loan  can  be 


METHODS   OF   FINANCING.  23 

made  on  fair  terms,  the  plan  has  advantages,  mainly 
in  the  fact  that  the  control  and  ownership  of  the  new 
undertaking  are  left  in  the  hands  of  the  original  parties. 
It  is  true  that  a  Ixinus  must  often  be  paid  to  secure  the 
money;  that  interest  must  be  paid  on  the  loan,  and  that 
the  borrowed  money  must,  sooner  or  later,  be  returned. 
If  the  enterprise  is  successful,  however,  the  indebted- 
ness and  interest  payments  are  easily  carried  and  paid 
off  in  due  time,  and  the  whole  amount  given  for  the 
use  of  the  money  should  be  small  compared  with  the 
profits  of  the  enterprise  or  compared  with  the 
interest  in  the  enterprise  that  must  have  been  given  to 
secure  the  needed  money  as  an  investment. 

If,  on  the  other  hand,  an  enterprise  ends  in  failure, 
the  loaning  plan  is  disastrous — far  more  so  than  if  the 
money  were  secured  as  an  investment  in  the  enterprise. 
For  this  reason  many  people,  well  able  to  borrow, 
prefer  to  get  part  or  all  of  the  necessary  money  as  an 
investment  in  the  enterprise  rather  than  as  a  loan.  In 
this  case  they  divide  up  the  risk.  They  do  not  look 
for  failure,  but  they  recognize  its  possibility  in  any 
undertaking,  no  matter  how  good.  Therefore  they 
prefer  to  diminish  their  own  interest  in  the  enter- 
prise and  in  the  profits  to  be  miade,  rather  than  to 
take  chances  of  a  total  and  perhaps  disastrous  loss  in 
case  of  failure. 

Also  while  the  interest  on  the  money  borrowed  is, 
in  the  case  of  a  good  enterprise,  negligible,  there  are 
other  dangers  connected  with  the  method.  Loans  and 
interest  payments  have  a  tendency  to  become  due  at 
inconvenient  times,  or  if  left  to  run  after  thev  become 


24  FINANCING   AN    ENTERPRISE. 

due,  may  be  called  unexpectedly.  Then  if  not  met, 
they  may  be  used  to  the  serious  embarrassment  of  the 
enterprise. 

As  a  matter  of  fact  loans  are  not  infrequently  made 
to  parties  having  promising  enterprises,  with  the  defi- 
nite hope  or  expectation  that  they  will  not  be  able  to 
pay  the  amount  when  due.  In  such  case  the  parties  mak- 
ing the  loan  promptly  foreclose  and  buy  in  the  enterprise 
at  a  tithe  of  its  real  value.  To  secure  properties  by 
foreclosure  in  this  way  is  regarded  by  those  who  en- 
gage in  the  practice,  as  entirely  legitimate  and  even 
clever  business.  The  fact  that  it  may  be  done  and 
is  done  should  always  be  borne  in  mind  when  loans 
are  made,  and  extensions  should  be  provided  for,  or 
time  sufficient  should  be  obtained  to  permit  the  enter- 
prise to  pay  out,  or  perhaps  provision  may  be  made  to 
meet  the  loan  from  other  sources,  if  it  should  prove 
desirable. 

Another  method  of  financing,  frequently  practiced, 
is  that  of  taking  in  moneyed  partners.  This  is  but  a 
modification  of  the  usual  plan  of  securing  money  as 
an  investment  in  the  enterprise — usually  in  the  form 
of  stock  subscriptions — but  it  has  some  special  advan- 
tages and   disadvantages  of   its   own. 

It  must  be  borne  in  mind  that  a  partner  has  all  the 
rights  in  the  business  that  the  original  owner  has 
himself.  He  can  interfere  in  the  management  of  the 
enterprise,  run  it  into  debt,  if  he  sees  fit,  or  make 
trouble  in  the  many  other  ways  possible  under  the 
partnership  arrangement. 

All  this  is  of  no  importance  if  tlie  partner  is  known 


METHODS    OF    FINANCING.  25 

to  be  the  right  kind  of  a  man,  who  will  shoulder  his 
part  of  any  burdens  to  be  borne  and  who  can  be  depen- 
ed  upon  to  co-operate  when  needed  and  to  do  nothing 
when  not  needed.  If,  however,  there  is  any  doubt 
as  to  the  character  or  disposition  of  the  prospective 
partner,  this  close  alliance  should  be  avoided — prefer- 
ably, and  as  is  commonly  done,  by  the  use  of  the  corpo- 
rate form. 

Another  point  to  be  considered  when  a  financing 
partner  is  taken  into  an  enterprise,  is  the  fact  that 
should  the  enterprise  not  reach  the  point  of  profit 
paying  before  its  funds  are  exhausted — a  contingency 
that  frequently  occurs — the  conditions  are  not  favor- 
able for  securing  further  money. 

In  a  corporation,  stock  may  be  reserved  for  just 
such  emergencies,  or  a  special  issue  of  preferred  stock 
or  perhaps  bonds  can  be  arranged.  In  a  partnership, 
on  the  contrary,  there  is  usually  no  reserve  of  any 
kind  that  can  be  offered  for  additional  money.  If 
miore  money  is  needed  each  partner  should,  of  course, 
contribute  pro  rata  of  his  interest  for  the  purpose, 
but  in  practice  it  not  uncommonly  happens  that  the 
"financing"  partner  refuses  to  do  this. 

Sometimes  the  moneyed  partner  refuses  because  he 
thinks  the  management  of  the  business  has  been  poor 
and  that  therefore  the  "working"  partner,  who  is  re- 
sponsible for  this,  should  bear  the  burden  of  securing 
additional  funds.  At  other  times,  he  declines  from 
purely  selfish  reasons,  thinking  that  the  working  part- 
ner's interests  are  sufficiently  large  to  force  him  to 
pull  the  enterprise  out   somehow  unaided.     On   rare 


26  FINANCING   AN    ENTERPRISE, 

occasions  help  is  refused  because  the  financing  partner 
hopes  that  the  embarrassment  of  the  business  will  re- 
sult in  conditions  which  can  be  made  to  serve  his  own 
interests,  possibly  resulting  in  his  acquisition  of  the 
whole  enterprise. 

In  any  such  case,  the  working  partner  must  do  the 
best  he  can.  He  may  be  able  to  borrow,  or  he  may 
have  to  make  very  material  sacrifices  of  his  own  inter- 
ests to  obtain  the  needed  funds.  In  such  case,  if 
the  enterprise  is  successful,  he  will  probably  be  able 
to  recoup  himself.  It  is,  however,  far  better  that  the 
possible  need  of  more  funds  should  be  anticipated  and 
provided  for  in  advance  by  some  provision  of  the 
partnership  agreement.  It  is  better  still  to  avoid  the 
contingency  by  the  incorporation  of  the  undertaking. 

The  usual,  and,  speaking  generally,  the  best  plan  of 
financing  is  by  the  sale  of  stock  in  the  incorporated 
enterprise.  It  offers  advantages  both  for  the  owner 
of  the  enterprise  and  the  investor  found  in  no  other 
system  of  business  organization.  The  use  of  the  cor- 
porate system  for  this  purpose  is  fully  discussed  in 
Chapter  XLI  of  the  present  work. 


CHAPTER  IV. 

REQUISITES  OF  A  SUCCESSFUL 
ENTERPRISE. 


For  a  com|Dlete  industrial  success  three  things  are 
essential : 

(i)   A  sound  undertaking. 

(2)  Sufficient  capital. 

(3)  Efficient  management. 

If  any  one  of  these  is  entirely  lacking,  failure  is 
reasonably  sure.  If  any  one  is  deficient,  the  diffi- 
culties of  success  are  enormously  increased.  In  any 
case  the  measure  of  success  usually  varies  directly 
with  the  greater  or  less  perfection  in  which  these 
essentials  are  found. 

The  necessity  for  a  sound  undertaking  will  be 
readily  admitted.  In  some  cases,  however,  an  under- 
taking must  be  developed  before  its  soundness  or  un- 
soundness can  be  determined.  In  other  cases,  enter- 
prises are  founded  on  unsound  undertakings,  as  a  re- 
sult of  fraud,  ignorance,  recklessness  or  poor  judgment 
on  the  part  of  the  "man  with  the  enterprise,"  usually 
coupled  with  "contributory  negligence"  on  the  part  of 
the  investor. 

The  number  of  failures  due  to  the  fact  that  the  basic 
undertaking  was  rotten  or  so  unsound  as  to  be  no 
proper  support  for  the  proposed  industrial  structure, 

27 


28  FINANCING    AN    ENTERPRISE. 

is  surprising.  A  striking  instance  within  the  writer's 
knowledge  still  stands  in  a  pleasant  rolling  district 
of  what  is  now  Oklahoma,  where  nature  is  not  only 
liberal  in  the  disposition  of  mineral  wealth,  but,  to 
make  it  easily  accessible,  has  inclined  the  rock  strata 
at  an  angle  of  nearly  45°. 

Here  a  vein  of  bituminous  coal  some  two  or  three 
inches  thick  crops  out  right  at  the  top  of  a  grassy  hill. 
Coal  is  not  abundant  in  that  portion  of  Oklahoma  and 
a  good  vein  of  the  material  is  a  development  proposi- 
tion of  much  interest.  The  little  seam  therefore, 
rightfully  enough,  attracted  attention.  Xo  prelimin- 
ary drilling  or  other  investigation  was.  however, 
deemed  necessary.  The  vein  was  there  and  could  l^e 
seen,  and  on  the  easy  assumption  that  its  thickness 
increased  with  depth,  was  taken  up  and  liberally 
financed  by  Northern  capitalists. 

A  complete  and  excellent  plant  was  erected  on  the 
outcrop.  Expensive  machinery  for  pumping  and  for 
mining  and  handling  coal  was  installed.  In  the  near 
vicinity  some  thirty-five  or  forty  comfortable  houses 
were  erected  for  the  accommodation  of  the  men,  to- 
gether with  stores,  shops,  stables  and  the  other  para- 
phernalia of  a  small  village.  Roads  were  laid  out 
around  the  mine;  a  spur  from  the  line  of  railroad, 
some  seven  miles  distant,  was  graded,  rails  were  laid 
and  everything  necessary  for  the  economical  and  con- 
venient operation  of  the  property  was  installed. 

W'hile  all  this  was  going  on  a  substantial,  well- 
timbered,  double  shaft  was  following  down  the  incline 
of  the   little  vein.     After  sinking  some  hundreds  of 


REQUISITES    OF    A    SUCCESSFUL    ENTERPRISE.        29 

feet  it  was  discovered  that  the  thickness  of  the  vein 
did  not  increase  with  depth  and  that  as  far  as  had  been 
gone  there  was  not  enough  coal  in  the  mine  to  operate 
its  own  hoisting  engines.  Then,  and  not  till  then 
diamond  drills  were  resorted  to  and  by  their  means 
the  property  was  shown  to  be  utterly  worthless  for 
purposes  of  coal  mining,  and  the  whole  enterprise,  on 
which  nearly  $100,000  had  been  expended,  was 
abandoned.  Practically  the  entire  investment  was 
lost.  Worse  still,  the  confidence  of  the  capitalists 
whose  money  had  been  so  ruthlessly  and  so  foolishly 
sunk  in  this  "hole  in  the  ground"  was  shaken — not 
only  as  to  this  special  failure,  but  as  to  the  whole  coun- 
try as  well.  As  a  matter  of  fact,  they  absolutely  re- 
fused to  advance  any  further  funds  for  enterprises  in 
that  part  of  the  country. 

In  the  instance  cited,  the  disastrous  results  achieved 
might  have  been  avoided  entirely  by  an  early  and  judi- 
cious use  of  the  diamond  drill.  The  failure  to  do  so 
can  only  be  ascribed  to  ignorance,  to  an  almost  crim- 
inal indifference  as  to  the  proper  methods  of  prelimin- 
ary procedure,  or  to  fraud  on  the  part  of  the  original 
promoters.  The  capitalists  were,  however,  also  much 
to  blame  for  not  insisting  on  a  proper  investigation  of 
the  property  before  sinking  their  money  in  premature 
development. 

In  some  cases,  as  has  been  said,  the  soundness  of 
an  undertaking  cannot  be  determined  in  advance,  the 
only  practical  test  being  a  more  or  less  complete  de- 
velopment. Thus  some  mechanisms  cannot  be  proper- 
ly judged  until  a  full-sized  working  model  has  been 


30  FINANCING   AN    ENTERPRISE. 

constructed.  The  results  then  show  whether  a  prize 
or  a  blank  has  been  drawn.  The  method  is  expensive, 
but  at  times  no  other  is  possible. 

Generally  speaking,  however,  the  value  of  an  enter- 
prise may  be  at  least  approximated  in  advance,  and 
when  this  can  be  done,  the  adoption  of  a  radically 
defective  undertaking  for  development  indicates  either 
fraud  or  some  inability  on  the  part  of  the  promoter, 
or  gross  carelessness  on  the  part  of  the  investor,  whose 
money  is  risked.  Sometimes  these  may  be  combined 
as  when — as  occasionally  happens — an  unlucky  mor- 
tal undertakes  in  all  good  faith  to  finance  an  enterprise, 
improbable  or  impossible  in  itself,  but  in  which  from 
lack  of  judgment,  knowledge  or  investigation,  he  has 
entire  faith.  He  sinks  his  own  and  his  friends'  money 
in  its  development  and  is  finally  threatened  with  ruin 
because  of  the  worthlessness  of  the  undertaking.  The 
temptation  is  then  strong  to  postpone  the  day  of  reck- 
oning, conceal  material  facts,  secure  more  money  and 
push  on  in  hopes  that  something  may  turn  up  to  re- 
lieve the  situation.  The  position  is  one  that  tends  to 
turn  an  honestly  mistaken  man  into  an  impostor. 

It  makes  but  little  difference  as  to  results,  however, 
whether  a  defective  enterprise  is  foisted  on  investors 
through  fraud,  ignorance  or  other  disabilities  of  the 
promoter,  or  from  their  own  carelessness.  They  are 
separated  as  effectually  from  their  money  in  the  one 
case  as  the  other  and  with  perhaps  as  little  satisfaction. 
Therefore,  as  a  matter  of  common  honesty,  no  pains 
should  be  spared  by  the  owner  or  promoter  to  prove 
the  value  of  his  enterprise  as  far  as  may  be  before  it 


KKIJUISITKS    OF    A    SUCCESSFUL    ENTERPRISE.         3 1 

is  presented  to  the  investor,  and  as  a  matter  of  the 
most  ordinary  precaution,  the  man  who  is  to  invest 
his  money  should  see  that  this  has  Ijeen  done,  or  is 
done  before  his  money  is  involved. 

The  necessity  for  the  second  essential  of  a  success- 
ful enterprise — sufficient  capital — will  hardly  be  ques- 
tioned. The  only  point  upon  which  a  difference  of 
opinion  is  likely  to  exist  in  this  matter  is  as  to  the 
amount  required.  Speaking  generally,  there  is  a 
strong  tendency  to  underestimate  the  amount  neces- 
sary for  any  particular  undertaking.  One  not  accus- 
tomed to  matters  of  the  kind  will  sit  down,  figure  out  the 
apparent  necessary  expenses,  add  a  fair  percentage  for 
incidentals  and  margin,  and  deem  the  matter  settled. 
One  experienced  in  the  work  knows  that  at  every 
stage  and  step  of  development  there  are  expensive  de- 
lays, modifications  of  original  plans,  unexpected  exper- 
imental work,  additional  equipment,  and  along  with 
it  all,  endless  incidental  but  unavoidable  extras  and 
expenses  that  bring  the  sum  total  far  above  anything 
that  w^ould  at  first  sight  seem  possible.  For  this  rea- 
son where  the  party  estimating  is  not  entirely  familiar 
with  the  particular  line  of  business,  a  considerable  ex- 
cess should  be  allowed  on  every  important  item  for 
unforeseen  expenses,  and  in  addition  a  liberal  percent- 
age be  set  aside  for  incidentals  and  operating  margin. 

A  feature  of  much  importance  to  be  considered  in 
this  connection  is  the  difficulty  of  raising  further  mon- 
ey for  an  enterprise  in  case  the  original  funds  are  ex- 
hausted before  it  reaches  a  condition  of  self-support. 

When  an  enterprise  is  first  presented,  if  the  proposi- 


32 


FINANCING    AN    ENTERPRISE, 


tion  and  conditions  are  favorable,  it  is  nearly  always 
possible  to  raise  the  amount  thought  necessary  for  its 
purposes,  and  it  is  a  measure  of  wise  precaution  to 
secure  a  treasury  reserve  of  cash  at  this  time  sufficient 
to  carry  the  company  through  to  success.  Whenever 
the  funds  provided  prove  to  be  insufficient  and  are  ex- 
hausted before  the  enterprise  has  reached  the  self-sus- 
taining point,  the  condition  is  peculiarly  unfortunate. 
The  failure  to  pull  through  is  hard  to  explain,  the  en- 
terprise is  descredited,  and  the  whole  thing  is  looked 
upon  as  at  least  a  "lame  duck,"  if  not  a  complete  fail- 
ure. 

Under  these  conditions,  to  secure  more  money  on 
any  ordinary  basis  is  almost  impossible.  Usually  then 
some  one  person  must  be  found,  or  a  small  syndicate 
be  formed,  to  furnish  the  requisite  money.  The  mat- 
ter is  always  one  of  great  difficulty  and  if  it  is  accom- 
plished, the  "carrying"  individual  or  syndicate  usually 
demands,  and  perforce  receives,  payment  out  of  all 
proportion  to  the  amount  of  the  investment.  The  en- 
terprise is  looked  upon  as  fair  game,  and  a  controlling 
interest  in  the  whole  or  even  more,  depending  upon 
the  necessities  of  the  stranded  undertaking,  is  not  con- 
sidered unreasonable.  It  is  a  case  where  money  must 
be  had  at  any  cost  and  this  cost  is  usually  fully  pro- 
portioned to  the  urgency  of  the  needs. 

Such  a  situation  should  be  avoided  by  a  sufficient 
provision  at  the  time  the  enterprise  is  launched  to 
carry  it  safely  through  to  the  point  to  be  attained.  If 
as  much  as  is  needed  cannot  be  obtained  at  that  time 
in   cash   or  safe   subscriptions,   the  enterprise   should 


REQUISITES    OF    A    SUCCESSFUL    ENTERPRISE,        33 

either  be  held  back  until  the  required  amount  can  be 
secured,  or  the  development  plans  be  so  modified  that 
the  amount  in  hand  will  suffice.  To  do  otherwise  is, 
as  a  rule,  to  invite  disaster. 

Sometimes  the  danger  from  this  source  is  antici- 
pated, and  provision  made  for  the  raising  of  additional 
funds  if  needed.  This  is  usually  done  by  the  reserva- 
tion of  stock.  Then,  in  case  more  funds  are  needed 
this  stock  can  be  offered  for  sale  and  the  whole  matter 
is  on  a  much  better  footing.  The  idea  of  failure  is  re- 
moved, and  the  whole  transaction  is  merely  one  of 
securing  additional  capital,  the  need  for  which  wa? 
seen  and  provided  for  in  advance. 

The  position  of  the  enterprise  which  has  reached  a 
point  of  self-support  and  moderate  returns,  but  which 
must  raise  more  capital  before  further  progress  can 
be  made,  while  not  exactly  favorable,  is  still  far  super- 
ior to  that  of  the  stranded  enterprise.  It  is  beyond 
the  dead  line.  It  has  life  and  vitality.  It  is  neither 
a  suppliant  nor  a  forlorn  hope.  The  risks  of  invest- 
ment in  it  are  minimized  and  there  is  a  certain  degree 
of  attractiveness  about  it  that  makes  the  raising  of 
additional  capital  very  much  easier.  The  situation  is 
not  an  uncommon  one  and  the  ordinary  methods  of 
securing  capital  may,  as  a  rule,  be  used  with  success. 

A  somewhat  unique  organization  was  formed  in 
New  York  City  some  years  since  for  the  express  pur- 
pose of  financing  enterprises  which  had  reached  this 
point  of  non-elastic  self-support.  Its  terms  were  also 
unique.  If  it  advanced  funds  sufficient  to  enable  the 
struggling  conipany  to  take  advantage  of  the  oppor- 


34  FINANCING    AN    ENTERPRISE. 

tunities  then  open,  or  to  extend  the  general  sphere  of 
its  operations,  the  "carrying  concern"  demanded  as  its 
compensation ; — first,  that  money  advanced  by  it 
should  be  a  lien  on  the  whole  enterprise ;  second,  that 
the  money  advanced  should  be  repaid  as  soon  as  it 
might  be  done  without  injury  to  the  business,  and 
third,  that  the  company  in  return  for  the  money  ad- 
vanced should  participate  for  a  term  of  years  in  the 
increased  profits  of  the  enterprise — usually  to  the  ex- 
tent of  about  25%.  The  arrangement,  though 
presenting  some  difficulties,  both  legal  and  operative, 
was  not  unfair,  but  the  company  has  since  retired  from 
active  business.  The  same  general  idea  is,  however, 
being  carried  out  by  individuals  with  considerable 
success,  the  terms  varying  with  each  enterprise  taken 
up. 

Of  the  requisites  for  the  successful  development  of 
an  enterprise,  the  third — efficient  management — is 
perhaps  the  most  important.  The  undertaking  may 
be  meritorious,  the  money  supply  may  be  more  than 
adequate,  but  without  good  management,  failure  is 
almost  assured.  On  the  other  hand,  though  the  un- 
dertaking be  indifferent  and  the  money  supply  scanty, 
a  first-class  manager  will  overcome  every  difficulty. 
Usually  the  degree  of  success  in  any  particular  enter- 
prise is  determined  very  accurately  by  the  ability  of 
its  management,  and  one  of  the  most  difficult  proljlems 
of  industrial  success  is  solved  when  good  management 
is  secured. 

Further,  if  tlie  enterprise  is  yet  to  be  financed,  the 
employment  of  a  manager  known  to  be  competent  and 


REQUISITES    OF    A    SUCCESSFUL    ENTERPRISE.         35 

successful  is  a  material  assistance  in  securing  funds. 
Apart  from  any  confidence  the  investors  may  have 
in  the  ability  of  the  manager  to  bring  the  enterprise 
to  a  successful  issue,  the  mere  fact  of  his  willingness 
to  have  his  name  coupled  with  the  enterprise,  is  a 
strong  and  weighty  testimonial  to  its  merits  and  prob- 
abilities of  success.  It  is  an  incidental  endorsement 
of  more  moment  to  the  average  investor  than  the  favor- 
able reports  of  half  a  dozen  technical  experts. 

It  might  also  be  noted  by  those  with  enterprises  to 
finance,  that  the  successful  manager  is  almost  invaria- 
bly a  person  of  some  means  as  well  as  ability,  and  that 
where  the  enterprise  is  such  as  to  enlist  his  entire  con- 
fidence, he  is  usually  quite  willing  to  take  an  interest 
therein  on  proper  terms  beyond  his  "per  diem." 
Where  this  is  the  case  the  endorsement  is  doubly 
strong,  and  the  parties  controlling  the  enterprise  arc 
justified  from  every  point  of  view  in  making  all  rea- 
sonable concessions  to  secure  the  subscription  of  the 
future  manager.  Such  a  subscription  is  not  only  an 
addition  to  the  financial  strength  of  the  enterprise  and 
a  potent  argument  for  other  subscriptions,  but  also 
amounts  to  a  hostage  from  the  manager  for  the  faith- 
ful performance  of  his  duties  and  for  his  loyal  and 
unswerving  support  of  the  undertaking. 

To  secure  a  good  manager  is  not  usually  an  easy 
matter.  Enterprises  are  always  looking  for  capital ; 
capital,  even  when  most  busily  occupied,  always  keeps 
a  wary  eye  on  the  industrial  field  for  anything  a  little 
extra  good  in  the  way  of  enterprises,  but  the  good 
manager  is  constantly  employed  and   is   not   looking 


36  FINANCING    AN    ENTERPRISE. 

round  for  new  openings.  He  usually  is  not  averse  to 
a  proposition  that  will  better  his  condition,  but  he 
is  not  waiting  "in  the  open"  for  anything  of  the  kind 
and  must  be  sought  if  he  is  to  be  found. 

The  difficulties  of  securing  good  management  are 
occasionally  much  complicated  by  the  number  of  "self- 
confessed"  experts  who  obstruct  the  industrial  ways. 
It  is  but  rarely  that  a  man  will  admit  even  to  himself 
that  he  is  lacking  in  the  highest  order  of  executive 
ability.  On  the  contrary,  men  who  have  never  man- 
aged a  successful  business  of  any  kind,  and  who  could 
not  run  a  corner  grocery  store  with  any  degree  of 
brilliancy,  will  cheerfully  offer  their  services  for  the 
most  responsible  positions.  If  through  any  chance 
such  a  candidate  has  some  basis  upon  which  to  claim 
consideration,  as  a  large  interest  in  the  enterprise,  or 
the  influence  of  friends  or  relatives,  then  no  matter 
what  his  lack  of  executive  experience  or  ability,  some- 
thing more  physically  effective  than  moral  suasion  is 
needed  to  keep  him  out. 

Notwithstanding  its  importance,  there  is  often  a 
singular  indifference  as  to  the  character  of  the  mana- 
ger employed.  An  enterprise  will  perhaps  be  selected 
with  the  greatest  care,  money  will  be  supplied  freely 
for  its  proper  development  and  operation,  and  then 
everything  up  to  this  point  having  been  done  in  the 
best  possible  way,  the  directors  of  the  enterprise  look 
round  for  a  cheap  manager  to  put  in  charge. 

Worse  economy  could  hardly  be  imagined.  A  few 
hundred  dollars  a  year  may  be  saved  on  the  manager's 
salary,  but  this  is  done  at  the  risk  of  the  whole  enter- 


REQUISITES    OF    A    SUCCESSFUL    ENTERPRISE.         37 

prise,  and  is  in  itself  the  very  worst  of  management. 
In  a  business  of  any  importance  the  annual  loss  in- 
volved in  poor  management  or  in  any  management 
short  of  the  best,  would  easily  amount  to  many  times 
the  manager's  entire  salary. 

In  the  selection  of  a  manager  the  very  patent  fact 
should  not  be  lost  sight  of  that  a  failure  to  make 
profits  that  might  be  secured  by  good  management, 
is  as  real  a  loss  and  almost  as  much  of  a  blunder  as  to 
lose  money  actually  on  hand,  and  that  a  manager  who 
fails  to  increase  the  profits  when  they  might  be  increas- 
ed, is  but  one  stage  in  advance  of  the  manager  who 
depletes  the  reserves.  Both  lose  money  and  it  is  only 
a  question  of  amount. 

It  is  a  somewhat  ungracious  matter  to  point  out 
failures  of  management,  but  such  a  striking  illustra- 
tion of  the  difference  between  good  and  bad  manage- 
ment and  of  the  importance  of  the  former,  is  afforded 
by  the  well-known  history  of  the  A.  T.  Stewart  estab- 
lishment of  New  York,  that  we  may  be  pardoned  for 
a   reference  to  the  matter. 

This  enterprise  was  founded  by  Mr.  Stewart  and 
was  worked  up  by  him  to  the  position  of  the  largest 
and  best  dry  goods  store  in  the  country.  It  was  known 
in  every  part  of  the  United  States  and  was  largely 
profitable.  At  Mv.  Stewart's  death  the  establishment 
was  taken  possession  of  by  one  of  Mr.  Stewart's  asso- 
ciates, not  so  well  versed  in  business  affairs.  As  one 
of  the  first  steps  the  well-known  and — from  a  business 
standpoint — immensely  valuable  name  of  A.  T.  Stew- 
art was  dropped.     Other  almost  equally  unfortunate 


38  FINANCING    AN    ENTERPRISE. 

changes  were  made,  and  the  career  of  the  magnificent 
business  was  diverted  from  the  upward  to  the  down- 
ward course  so  decisively  that  hardly  thirty  years  wa? 
required  for  its  financial  involvement  and  the  discredit 
and  retirement  of  its  management. 

The  business  then  again  came  under  capable  con- 
trol under  the  name  of  John  Wanamaker,  who 
appeared  as  the  successor  of  A.  T.  Stewart,  the  inter- 
vening regime  being  ignored.  The  course  and  policy 
of  the  business  were  altered,  better  methods  were  intro- 
duced, the  business  promptly  responded  and  now  once 
more  stands,  not  as  the  leading  business  establishment 
of  the  country,  but  well  up  among  the  largest,  best- 
managed  and  most  profitable  of  its  kind. 

In  the  inception  of  an  enterprise  good  management 
is  peculiarly  difficult  to  secure,  but  is  peculiarly  neces- 
sary. After  running  a  number  of  years,  a  business  is 
officered  and  managed  by  a  process  of  natural  selec- 
tion. Men  of  the  required  ability  are  gradually  se- 
cured as  opportunity  offers  or  work  up  to  the  places 
they  are  fitted  for.  The  material  is  at  hand,  or  comes 
to  hand.  It  is  then  merely  a  matter  of  fitting  the 
right  man  into  the  right  place. 

In  a  new  business,  however,  there  is  no  opportunity 
for  the  preparation  and  demonstration  of  managerial 
timber.  The  natural  selection  that  obtains,  or  that 
may  obtain,  among  the  employees  of  an  established 
business,  is  not  possible.  Neither  are  there  usurdly 
any  practicable  methods  of  "trying  out"  a  manager 
before  he  is  employed.  On  the  contrary  his  selection 
must  be  made  for  better  or  for  worse  on  such  informa- 


REQUISITES    OF    A    SUCCESSFUL    ENTERPRISE.        39 

tion  as  may  be  at  hand  or  be  obtained  from  others  and 
his  trial  must  be  a  practical  one  made  at  the  expense 
of  the  business. 

The  most  usual  course  in  a  case  of  this  kind,  where 
it  is  possible  and  where  the  importance  of  good  man- 
agement is  recognized,  is  to  draw  a  manager  from 
some  similar  business  or  enterprise  in  which  he  is 
already  successfully  employed  and  in  which  his  ability 
has  been  demonstrated.  This,  of  course,  involves  the 
payment  of  a  higher  salary  than  the  desired  official 
is  already  receiving,  and  the  plan  is  not  always  then 
successful,  the  amiable  intentions  of  the  new  concern 
being  frequently  frustrated  by  a  prompt  increase  of 
the  manager's  salary  by  the  old  company.  Also  there 
is  some  question  of  ethics  involved  in  an  attempt  to 
withdraw  a  trusted  employee  from  another  establisli- 
ment.  Within  reasonable  limits,  however,  this  is  ex- 
pected, is  undoubtedly  good  business  and  is  very  fre- 
quently done. 

If  this  plan  is  not  feasible,  a  successful  manager  in 
some  other  line  of  business  is  likely  to  be  a  good 
selection.  In  this  case,  however,  the  qualifications  of 
the  proposed  manager  should  be  investigated  with 
great  care.  His  success  may  have  been  due  to  his 
very  complete  grasp  of  the  details  of  his  own  business, 
rather  than  to  his  general  executive  ability,  and  in  such 
case,  coming  into  a  new  business,  he  might  be  an 
utter  failure.  It  should  also  be  borne  in  mind  that  the 
inauguration  of  a  new  business  is  a  much  more  com- 
plex and  difficult  problem  than  its  conduct  when  once 
in  running  order,  and  that  a  man  who  can  successfully 


40  FINANCING    AN    ENTERPRISE. 

carry  on  an  established  business  may  be  totally  unable 
to  give  it  a  successful  start. 

Another  frequent  source  of  good  executive  material 
for  a  new  enterprise  is  found  in  the  rising  employees 
of  other  established  businesses.  In  a  large  concern 
it  is  usually  impossible  for  all  the  members  of  the 
force  to  be  advanced  as  rapidly  or  as  high  as  their 
abilities  would  justify.  In  such  case,  the  employees 
unable  to  secure  promotion  in  their  own  establishment 
are  not  only  willing  but  anxious  to  secure  employment 
elsewhere  more  suitable  to  their  capacities.  Frequently 
reliable  information  as  to  their  ability  and  standing 
may  be  obtained  direct  from  their  employers,  who  are 
willing  to  assist  their  employees  even  though  at  some 
loss  to  themselves.  Such  information,  taken  in  connec- 
tion with  the  position  the  proposed  manager  is  filling, 
the  manner  in  which  his  duties  are  performed,  and  his 
general  character  and  disposition,  should  give  a  very 
fair  idea  of  his  executive  ability  and  the  likelihood 
of  his  successful  career  in  the  new  field. 


CHAPTER  V. 

RELATIVE    STATUS    OF    THE    UNDERTAK- 
ING, CAPITAL  AND   MANAGEMENT. 


The  relative  values  of  the  three  essential  features 
of  a  successful  enterprise  cannot  be  fixed  with  pre- 
cision. They  vary  too  greatly  with  the  conditions. 
Even  in  the  same  enterprise,  they  are  held  in  varvin_g 
estimation  by  the  different  parties  concerned,  according 
to  the  point  of  view  to  which  their  interests  incline 
them. 

Of  the  three  essentials  discussed  in  the  preceding 
chapter — the  undertaking,  the  money  and  good  man- 
agement— the  author  would,  speaking  generally,  give 
good  management  much  the  highest  place.  All  three 
are  obviously  necessary  to  the  best  success,  but  no  mat- 
ter how  good  the  undertaking  nor  how  liberal  the  sup- 
ply of  money,  all  may  be  ruined  by  bad  management, 
whereas  even  a  poor  undertaking,  or  a  good  undertak- 
ing crippled  by  lack  of  money,  will,  unless  the  handicap 
is  too  heavy,  be  brought  to  a  successful  issue  by  good 
management. 

While  all  this  is  theoretically  indisputable,  in  prac- 
tice management  receives  but  scant  consideration  in 
the  apportionment  of  interests.  As  a  rule,  capital  and 
the  undertaking  get  together,  divide  the  prospective 
profits  between  them,  and  then  look  around  for  an  able 

41 


42  FINANCING   AN    ENTERPRISE. 

executive  who  will  work  these  profits  out.  They  may 
pay  their  manager  a  large  salary;  they  may  give  him 
some  small  percentage  of  the  profits,  or  may  even  go 
so  far  as  to  give  him  an  interest,  or  an  opportunity 
to  earn  one,  in  the  business  itself.  This,  however,  is 
the  usual  limit.  As  to  any  serious  consideration  in  the 
general  enterprise,  the  manager  is  literally  not  in  it. 
He  is  fitted  in  afterward;  if  he  prove  a  misfit,  so  much 
the  worse  for  the  enterprise.  The  conflicting  claims 
of  capital  and  the  undertaking  stand  first  and  until 
these  are  adjusted,  the  importance  of  good  manage- 
ment is  practically  ignored. 

These  relative  values  of  capital  and  the  undertaking 
are  in  a  constant  condition  of  fluctuation.  If  times  are 
hard  and  the  money  market  tight,  or  the  individual 
bank  account  low,  the  man  with  money  is  coldly  in- 
difl"erent  to  the  claims  of  the  undertaking  and  must 
be  approached  with  deference  and  with  persuasive 
propositions.  If,  on  the  other  hand,  the  financial  con- 
ditions are  easy  and  investment  money  plenty,  capital 
and  the  undertaking  meet  on  much  more  equal  grounds 
and  it  is  then  a  battle  royal  between  them  as  to  their 
relative  status  and  the  division  of  the  spoils. 

Again,  if  the  proposition  is  one  of  unusual  attract- 
iveness and  is  properly  presented,  with  its  strong  points 
brought  into  artistic  prominence  and  its  weaker  feat- 
ures draping  the  far  perspective,  the  undertaking, 
if  financial  conditions  be  favorable,  has  the  vantage 
ground.  Or  if  the  proposition  is  desirable,  and  the 
parties  presenting  it  have  some  financial  strength  of 
their  own  so  that  they  can  meet  the  capitalist  with  the 


THE  UNDERTAKING,  CAPITAL  AND  MANAGEMENT.      43 

easy  independence  that  inspires  respect,  the  under- 
taking again  occupies  a  superior  position.  Conversely, 
even  though  the  undertaking  be  ever  so  good,  if  the 
parties  presenting  it  are  men  of  Hmited  means,  and, 
as  is  so  often  the  case,  utterly  unable  to  carry  the 
undertaking  themselves  or  even  hold  it  for  any  length 
of  time,  perhaps  only  controlling  it  under  a  short 
option,  the  conditions  for  the  men  with  the  enterprise 
are  exceedingly  unfavorable.  Then  those  presenting 
it  must  usually  take  whatever  proportion  of  the 
financed  enterprise  the  capitalist  is  willing  to  allow 
them,  which  is  not  ordinarily  excessive. 

It  must  also  be  borne  in  mind  that  the  apportion- 
ment between  the  owners  and  the  men  with  money 
varies  greatly  according  to  the  basis  upon  which  the 
matter  is  considered.  Men  of  large  means,  if  inter- 
ested in  an  enterprise,  usually  take  it  up  in  its  entirety, 
and  either  alone  or  in  connection  with  their  associates 
supply  or  arrange  for  all  needed  funds.  In  such  event 
they  naturally  expect  to  dictate  terms. 

If,  however,  the  necessary  funds  are  to  be  raised  by 
the  accumulated  contributions  of  a  number  of  smaller 
investors,  there  is  usually  no  concert  of  action  among 
them,  no  individual  subscription  is  large  enough  to 
influence  the  proposition  materially,  and  these  small 
men  must  perforce,  if  they  wish  to  get  into  the  enter- 
prise at  all,  accept  the  proffered  terms.  It  is  needless 
to  say  that  these  are  far  less  advantageous  than  those 
secured  by  the  larger  investors. 

As  may  be  inferred,  there  is  no  general  rule  as  to 
the  division  of  interests  between  the  parties  controll- 


44  FINANCING    AN    ENTERPRISE. 

ing  the  undertaking  and  those  controlHng  capital.  It 
may  be  said,  however,  that  ordinarily  where  the  enter- 
prise is  presented  to  men  of  means,  these  latter  expect, 
and  generally  get  at  least  a  controlling  interest  in  the 
financed  enterprise.  They  may  get  more,  or  where 
the  undertaking  is  very  attractive  or  is  presented  under 
unusually  favorable  conditions,  may  take  much  less, 
but  the  general  expectation  of  the  man  with  money 
is  that  capital  shall  control.  The  man  with  the  enter- 
prise must  recognize  this  position  of  the  capitalist, 
and,  if  he  considers  this  too  much  to  give  for  the 
money  he  needs,  must  present  the  enterprise  in  such 
a  way  as  to  overcome  the  capitalistic  contention,  or 
on  such  a  basis  that  the  question  does  not  arise.  A 
full  discussion  of  the  presentation  of  the  enterprise 
will  be  found  in  later  chapters. 

The  position  of  the  capitalist  is  not  unreasonable. 
Money  is  essential.  Without  it  nothing  goes  in  the 
industrial  world,  and  it  is  not  astonishing  if  the  capi- 
talist, seeing  the  necessity  and  the  power  of  money,  ~ 
gets  a  very  much  exaggerated  idea  of  its  importance 
and  imagines  that  it  is  the  one  thing  needful. 

The  phenomenon  has  no  direct  bearing  on  the  sub- 
ject under  discussion,  but,  as  the  "man  with  the  enter- 
prise" gradually  emerges  from  financial  obscurity  into 
the  capitalistic  class,  the  gradual  conversion  of  his 
first  indignant  denunciations  of  the  position  taken 
by  the  "man  with  the  money"  into  first  indifference, 
then  acquiescence,  followed  by  complaisant  regard  and 
finally  by  approving  adoption,  is,  to  say  the  least,  very 
significant  of  one  trait  of  human  nature. 


1 


THE  UNDERTAKING,  CAPITAL  AND  MANAGEMENT.     45 

Apart,  however,  from  any  exaggerated  respect  for 
money,  the  capitaHst  has  some  grounds  for  his  posi- 
tion. Theoretically  the  undertaking  and  the  capital 
for  its  operation  are  integral  and  equally  important 
parts  of  the  one  industrial  project.  They  participate 
equally  in  the  risks  and,  with  due  regard  to  any  differ- 
ences in  the  original  values  involved,  should  partici- 
pate equally  in  the  profits.  In  other  words,  the  arrange- 
ment is  a  partnership  of  capital  and  property,  and,  from 
this  point  of  view,  should  be  governed  by  the  usual 
partnership  regulations. 

From  the  practical  standpoint,  however,  the  situa- 
tion is  far  different.  The  enterprise  is  unproved, 
while  capital  is  of  an  established  and  known  value. 
The  enterprise  is  the  possibility ;  capital  is  the  reali- 
zation. Capital  is  recognized  all  over  the  civilized 
world  and  may  be  converted  into  the  local  standards 
of  value  of  any  place  by  a  simple  operation  in  ex- 
change. It  is  the  substance  of  things  only  hoped  for 
in  the  enterprise,  and  may  be  transmuted  at  any  time 
into  food,  clothing,  houses,  automobiles  and  other 
desirable  things  on  a  fixed  and  well-known  basis.  The 
enterprise  cannot.  Capital  is  the  gathered  harvest. 
The  undertaking  is  merely  the  soil  of  more  or  less 
unknown  possibilities,  which  must  be  plowed,  sown 
and  carefully  tended,  and  from  which,  if  all  the  perils 
of  flood,  drought,  storm,  frost,  insects  and  other  de- 
structive threatenings  are  safely  passed,  a  more  or 
less  plentiful  harvest  of  capital  may  at  last  be  reaped. 

The  hard-headed  capitalist  does  not,  ordinarily, 
reason  so  lengthily  as  a  basis  for  his  demands  upon  the 


46  FINANCING    AN    ENTERPRISE. 

enterprise.  He  merely  recognizes  the  fact  that  money 
IS  hard  to  get  and  heavy  to  hold,  and  that  he  has  got 
it,  and  usually  governs  himself  accordingly.  The 
word  "usually"  is  employed  advisedly,  as  even  capi- 
talists occasionally  lose  their  mental  balance  and  pour 
their  treasured  reserves  into  Keely  motors,  sea-water 
gold,  and  other  equally  alluring  rat-holes  with  most 
surprising  cheerfulness  and  prodigality. 

The  owner  of  the  ordinary  enterprise  does  not, 
however,  meet  with  any  such  pleasing  reception.  He 
usually  runs  counter  to  the  capitalist  on  the  hard- 
headed  side  and  must  show  a  reason  for  the  hope  that 
is  in  him.  Ordinarily  the  reason  must  be  a  very  sound 
one.  If  it  appeals  to  the  capitalist  he  will  consent  to 
consider  the  undertaking.  If  he  finally  approves  of 
it,  he  will  then  agree  to  invest  the  least  possible 
amount  of  money  that  will  apparently  suffice  to  prove 
the  undertaking,  and  for  this  will  exact  the  utmost 
interest  that  can,  under  pressure,  be  extorted  from  the 
man  with  the  enterprise. 

As  to  the  basis  of  the  capitalist's  demand  for  the 
control  of  the  enterprise,  we  can  do  no  better  than  to 
quote  the  utterance  of  a  prominent  New  York  capi- 
talist to  parties  who  were  seeking  to  interest  him  in  a 
particularly  promising  scheme.  "You  need  my  money 
to  make  this  a  success.  You  will  not  get  it  unless  you 
give  me  a  sufficient  interest  to  make  it  wt)rth  while. 
Also,  as  I  don't  care  to  put  my  money  and  property 
into  the  hands  of  other  people,  this  interest  must  be 
large  enough  to  give  me  control." 

This  puts  the  capitalistic  position   very  briefly  and 


THE  UNDHKIAKINC;,  CAPITAL  AND  M  ANAGEM  I'.NT.      47 

very  clearly.  I'roni  his  point  of  view  it  is  hut  ordinary 
common  sense,  and  the  man  with  the  enterprise  must 
recognize  this  position  and  govern  himself  accordingly. 
It  must  also  be  borne  in  mind  that  the  capitalist 
is  usually  an  able  man  of  afifairs,  familiar  with  the 
methods  by  which  the  successes  of  the  industrial  world 
are  obtained,  and  speaking  generally,  far  better  quali- 
fied to  manage  and  direct  the  financial  features  of  an 
enterprise  than  is  the  original  owner,  or  the  parties 
by  whom  the  enterprise  is  controlled.  His  manage- 
ment and  control  should,  of  course,  be  under  such 
suitable  regulation  and  restriction  as  will  protect  the 
parties  bringing  the  enterprise.  These  regulations 
need  not  in  any  way  interfere  with  its  proper  business 
management.  If  the  capitalist  is  acting  in  good  faith, 
he  is  usually  quite  willing  to  agree  to  all  reasonable 
provisions  to  this  end.  If  he  is  not,  the  man  with  the 
enterprise  would  better  go  further,  for  he  can  cer- 
tainly fare  no  worse. 


PART  II.— INVESTIGATION    OF  AN 
ENTERPRISE. 


CHAPTER  VI. 
IMPORTANCE  OF  INVESTIGATION. 


Possibilities  of  new  commercial  activity  exist  every- 
where and  are  constantly  arising.  A  ledge  of  marble 
is  discovered  on  a  New  England  farm ;  a  Texas 
rancher  finds  himself  the  owner  of  a  mountain  of 
yellow  ochre;  a  Nevada  prospector  stumbles  on  a 
vein  of  mineralized  quartz ;  an  inventor  brings  out 
a  new  typewriter  or  a  system  of  wireless  telegraphy; 
the  capitalist  lays  his  plans  for  the  consolidation  of 
rival  railroads,  the  formation  of  a  trust  or  the  develop- 
ment of  a  new  process. 

In  many  cases  the  original  owners  of  these  possi- 
bilities are  either  unaware  that  they  possess  an  enter- 
prise— or  the  basis  of  an  enterprise — or  are  unable  to 
finance  or  develop  it  if  they  know  of  its  existence 
and  it  lies  dormant  until  taken  up  by  some  neighbor, 
friend  or  outside  promoter.  These  promoters  may 
themselves  secure  the  money  needed  for  the  enterprise, 
or  they  may  pass  it  along  to  other  promoters  who 
interest  capitalists.     These  latter  may  keep  the  enter- 

48 


IMPORTANCE    OF    INVESTIGATION.  49 

prise  themselves,  or  may  sell  it,  or  perhaps  capitalize 
it  and  offer  the  stock  for  public  investment. 

When  any  one  of  the  thousand  and  one  possibilities 
of  the  business  world  is  brought  forward,  no  matter 
by  whom  or  in  what  stage  of  its  progress  to  complete 
development,  the  first  question — and  from  a  business 
standpoint,  the  most  important  question — is,  "Will  it 
pay?"  This  question  can  only  be  answered  by  investi- 
gation. It  is  obvious,  then,  that  this  investigation  is 
of  the  most  vital  importance  to  every  one  interested, 
whether  owner,  promoter,  operator  or  investor.  Upon 
its  thoroughness,  intelligent  direction  and  accuracy 
depend  the  safety  of  the  investment  and  to  a  very  large 
degree  the  whole  future  of  the  enterprise. 

Notwithstanding  the  importance  and  the  very  ele- 
mentary necessity  of  such  precautions,  enormous  sums 
are  lost  each  year  simply  because  the  proper  investi- 
gations of  enterprises  are  not  made.  Too  often  those 
promoting  an  enterprise  are  quite  willing  to  take 
chances  themselves  and  apparently  think  that  what  is 
good  enough  for  them  is  good  enough  for  their  friends 
or  such  portion  of  the  public  as  they  may  induce 
to  invest.  At  other  times  investigation  is  omitted 
from  absolute  indifference.  More  often  it  is  the  result 
of  ignorance  as  to  what  should  be  done,  or  to  a  mis- 
taken economy,  or  to  actual  lack  of  the  funds  required. 
Not  infrequently  this  neglect  of  the  proper  investiga- 
tion is  carried  so  far  that  in  connection  with  subse- 
quent representations  it  becomes  absolutely  fraudulent, 
and  many  a  promoter  of  this  stripe  has  escaped  a 
prolonged  residence  in  the  jails  of  the  country  only 


50  FINANCING    AN    ENTERPRISE. 

from  the  reluctance  of  his  victims  to  spend  the  requisite 
money  to  put  him  there. 

Examples  of  the  indifference  of  both  promoters  and 
investors  to  the  necessity  of  investigation  are  numer- 
ous. Mining  propositions  are  offered  with  defective 
titles;  inventions  are  financed  while  unprotected  by 
patents ;  companies  are  organized  to  operate  under 
licenses  which  convey  little  or  nothing;  factories  are 
established  to  manufacture  products  for  which  there 
is  no  sufficient  demand,  or  are  erected  in  places  where 
raw  material  is  not  available  or  where  markets  are 
too  distant;  worthless  mines  are  developed  at  great 
expense ;  railroads  are  constructed  like  the  one  financed 
by  Col.  Carter  of  Cartersville,  which,  as  described  by 
an  unfriendly  critic,  "began  nowhere  and  ended  no- 
where."    Such  enterprises  are  familiar  to  all. 

A  case  in  point  occurred  some  years  ago  in  the 
writer's  immediate  knowledge.  An  inventor  of  con- 
siderable reputation  and  some  achievement  stumbled 
upon  a  new  principle  in  the  construction  of  phono- 
graphs. The  idea  seemed  reasonable  and  promising — 
so  much  so  that  when  he  approached  a  few  friends 
with  a  proposition  for  money  to  construct  experimen- 
tal apparatus,  his  proposal  was  promptly  accepted. 
As  soon  as  terms  were  arranged,  a  machinist  was 
employed  and  construction  work  began.  All  went 
well  for  a  few  weeks  until  one  of  the  parties  con- 
cerned— who,  it  may  be  said,  was  himself  an  attorney 
— while  looking  up  patent  matters  connected  with 
another  enterprise,  thought  it  well  to  see  what  had 
been  patented   in  the  line  of  their  own  undertaking. 


IMPORTANCE    OF    INVESTIGATION.  5I 

His  investigation  quickly  resulted  in  the  discovery 
that  some  years  before  Prof.  Bell,  of  telephone  fame, 
had  discovered  and  fully  patented  everything  the  little 
syndicate  was  striving  to  accomplish.  The  enterprise 
came  to  an  abrupt  conclusion. 

In  this  case  no  investigation  of  any  kind  had  been 
made.  Sometimes,  however,  even  when  an  investi- 
gation is  undertaken,  it  falls  short  in  some  vital  detail. 
An  instance  of  this  kind  within  the  knowledge  of  the 
writer,  so  frankly  a  failure  that  no  exception  can  be 
taken  to  its  citation,  may  be  given. 

In  a  somewhat  distant  part  of  the  country,  a  heavy 
vein  of  sandstone  asphalt  had  been  discovered  and  it 
and  its  surroundings  investigated  with  considerable 
care.  The  quantity  proved  entirely  sufficient,  the  qual- 
ity was  reported  as  excellent  by  experts,  the  vein  lay 
in  a  position  to  permit  of  easy  working  from  the  sur- 
face down,  the  location  was  readily  accessible,  good 
roads  already  existed  to  a  shipping  point  but  a  few 
miles  distant,  and  an  easily  graded  right  of  way  was 
available  for  the  construction  of  a  railroad  spur  into 
the  property.  All  the  conditions  seemed  favorable 
and  money  for  the  development  of  the  property  was 
contributed  freely. 

The  general  manager,  a  pleasant,  affable  gentleman, 
of  good  standing  and  fair  general  ability  but  entirely 
lacking  in  successful  experience  in  the  asphalt  business, 
was  selected  from  among  the  stockholders  and  placed 
in  charge.  He  took  hold  with  much  energy  and 
enthusiasm,  built  a  little  village  for  the  accommodation 
of  his  employees,  with  office,  store,  church  and  school- 


52  FINANCING    AN    ENTERPRISE. 

house,  all  complete  and  in  thoroughly  good  style, 
installed  a  first-class  refining  plant  of  a  design  in  suc- 
cessful use  in  another  part  of  the  country,  put  in  all 
necessary  apparatus  for  the  mining  and  handling  of 
the  material,  graded  the  railroad  right  of  way,  piped 
in  a  water  supply  and  generally  prepared  for  the  active 
operations  anticipated. 

Upon  the  completion  of  the  'installation,  an  experi- 
mental run  was  made  and  it  was  then  discovered  that 
owing  to  peculiar  conditions  existing  in  the  deposit, 
the  refining  apparatus  was  absolutely  ineffective.  The 
difficulty  could  not  be  overcome;  the  whole  enterprise 
fell  through  and  the  investment  amounting  to  over 
$40,000  was  an  almost  total  loss.  The  deposit,  as  it 
stands,  is  still  awaiting  development  and  may  be  pur- 
chased with  all  its  improvements  at  a  heavy  reduction 
from  first  cost. 

In  this  case  the  investigation  had  stopped  just  one 
step  short  of  the  proper  point.  A  test  run  of  a  small 
quantity  of  the  material  in  an  operating  refinery  at 
some  other  asphalt  plant  would  have  shown  at  a  com- 
paratively trifling  expense  that  the  machinery  was  not 
adapted  to  the  work.  Or,  if  this  was  impractical  on 
account  of  the  rivalry  existing  between  the  different 
asphalt  refineries  of  the  country  at  that  time,  the 
obviously  prudent  alternative  would  have  been  the 
construction  of  a  small  working  model  of  the  machin- 
ery which  could  have  demonstrated  its  ineffectiveness 
at  a  moderate  cost.  Or,  if  a  working  demonstration 
with  full-sized  apparatus  was  essential,  the  installation 
might  have  been  made  piece  by  piece,  each  piece  being 


IMPORTANCE    OF    INVESTIGATION.  53 

tested  before  the  next  was  begun,  and  no  expense 
beyond  being  incurred  until  this  was  done.  The  point 
of  weakness  would  then  have  been  discovered  before 
any  considerable  expenditure  had  been  made. 

Any  of  these  methods  would  have  involved  some 
little  delay,  but,  as  it  turned  out,  would  have  saved 
many  thousand  dollars  of  money  and  the  year  or  more 
of  time  that  was  thrown  away  on  the  costly  develop- 
ment of  a  striking  fiasco. 

In  the  case  cited  there  were  no  serious  obstacles 
in  the  way  of  a  full  investigation.  It  sometimes  hap- 
pens, however,  that  the  parties  most  interested — the 
owner,  promoters  or  even  those  putting  money  into 
the  enterprise — will  themselves  stand  in  the  way  of  a 
proper  investigation.  In  some  cases  there  is  no  direct 
refusal  to  investigate,  but  it  is  simply  not  undertaken 
as  unnecessary,  of  too  much  trouble  or  too  great  an 
expense.  In  other  cases,  however,  a  proposal  to  inves- 
tigate the  merits  of  an  enterprise  is  met  with  a  delib- 
erate and  sometimes  very  emphatic  refusal. 

Such  a  refusal  may  be  due  to  one  of  several  reasons. 
Fraud  is  the  most  obvious  inference  but  the  inference 
is  frequently  at  variance  with  the  facts.  Sometimes, 
such  a  refusal  is  due  to  the  perhaps  half-acknowledged 
feeling  of  the  parties  that  they  would  rather  have  a 
good  run  for  their  money — or  the  money  of  their 
backers — and  test  the  enterprise  by  actual  develop- 
ment, than  to  have  it  nipped  in  the  bud  by  the  unfa- 
vorable opinion  of  some  hard-headed  expert  who 
might  of  course  be  mistaken  in  his  report  on  that  par- 
ticular enterprise.     Again,  a  refusal  will  arise  from  a 


54  FINANCING    AN    ENTERPRISE. 

fear  that  an  investigation  of  the  enterprise,  which 
may  be  an  unpatented  in\'ention,  an  unprotected  pro- 
cess or  an  unsecured  property,  may  lead  to  its  loss. 
Occasionally  a  refusal  results  from  an  honest  belief 
that  such  investigation  will  not  be  a  fair  one,  or  will 
be  conducted  by  improper  or  incompetent  parties. 

In  both  of  these  latter  cases,  it  wnll  be  recognized 
that  the  refusal  may  be  entirely  justifiable,  not  neces- 
sarily indicating  fraud  in  the  enterprise  or  even  an 
unreasonable  disposition  on  the  part  of  its  owners  or 
promoters.  Speaking  generally,  however,  when  the 
proper  investigation  of  an  enterprise  is  refused  or 
CA-aded,  the  enterprise  involved  should  be  "\-iewed  with 
deep  suspicion,  and  unless  some  satisfactory  method 
for  its  investigation  can  be  agreed  upon,  should  be  left 
severely  alone.  There  are  people — of  the  kind  who 
are  soon  parted  from  their  money — who  enjoy  the 
gamble  of  backing  an  uninvestigated  proposition,  and 
their  amusement  should  not  be  interfered  with  by 
any  other  class  of  investors. 

It  may  be  said  that  people  ^•ery  frequently  do  go 
in  with  an  inventor  or  discoverer  on  a  sort  of  "blind 
pool"  basis,  with  verv  inadequate,  if  anv  investigation, 
possibly  nothing  further  than  a  general  discussion  of 
the  matter  with  the  party  presenting  the  enterprise. 
In  such  case  they  trust  that  tlie  party  in  charge  will 
materialize  his  expectations  so  far  at  least  as  to  bring 
them  out  whole,  and  thev  hope  for  a  great  deal  more. 
Such  an  investment,  while  entirely  legitimate,  is  purely 
speculative  and  wholly  outside  the  realm  of  ordinary 
business.     Il  is  a  "grul)-staking"  proposition  with  the 


IxMPORTANCE    OF    INVESTIGATION.  55 

odds  much  against  the  parties  putting  up  the  money. 

Instances  of  such  investments  are  famiHar.  But  a 
few  years  since  a  very  skilful  chemist  of  much  repute 
in  synthetical  work  spent  a  term  in  jail  as  an  inci- 
dental result  of  just  such  an  undertaking.  He  either 
had,  or  professed  to  have  discovered  a  formula  for  the 
synthetical  manufacture  of  camphor.  In  other  words, 
he  claimed  to  be  able  to  produce  camphor  by  the  com- 
bination of  chemicals.  He  also  claimed  that  he  could 
do  this  at  a  price  far  below  the  cost  of  the  natural  gum. 

The  chemist's  claims  were  naturally  received  with 
respectful  consideration,  and  though  backed  up  by 
nothing  further  or  stronger  than  his  own  statements, 
were  deemed  of  sufficient  importance  to  justify  the 
construction  of  an  experimental  plant.  Accordingly 
a  well-known  firm  of  manufacturing  chemists  ad- 
vanced $15,000  for  the  construction  and  equipment 
of  a  laboratory  for  the  demonstration  of  the  process 
and  for  the  manufacture  of  the  camphor  thereafter. 

The  demonstration  was,  however,  in  a  sense  a  fail- 
ure, as  the  chemist,  instead  of  expending  the  money 
in  laboratory  construction  and  in  the  production  of 
the  gum,  diverted  it  to  his  own  personal  use.  Whether 
he  really  was  able  to  manufacture  camphor  synthet- 
ically has  never  been  divulged. 

In  this  case  the  claims  of  the  chemist  were  verv 
direct,  were  given  plausibility  by  previous  discoveries 
made  by  him,  and  the  rewards  of  success  were  so 
great  as  to  perhaps  justify  the  risk  of  the  money. 
It  was,  however,  a  pure  matter  of  taking  chances  and 
apparently  in  this  case  the  chances  went  wrong. 


56  FINANCING   AN    ENTERPRISE. 

Possibly  the  most  notorious  case  of  a  "blind"  in- 
vestment in  modern  times  is  that  of  the  Keely  motor. 
The  details  of  this  very  remarkable  enterprise  are 
interesting  but  are  far  too  complicated  for  narration 
here.  It  is  sufficient  tO'  say  that  for  over  twenty  years 
Mr.  Keely  maintained  the  secrecy  of  his  work,  never 
showing  any  practical  results  and  always  refusing  to 
permit  investigation  beyond  a  certain  point.  He  was 
willing  to  show  the  results  of  his  alleged  wonderful 
force,  or  application  of  force,  but  any  proposition 
looking  to  a  real  investigation  was  either  met  by  a 
direct  and  very  positive  refusal,  or  was  led  astray  by 
a  cloud  of  meaningless  words  and  phrases,  that  were 
seemingly  held  in  reserve  for  just  such  occasions. 

Meanwhile  Mr.  Keely's  backers,  who  were  business 
men  of  the  highest  personal  and  financial  standing, 
stood  by  him  year  after  year  through  disappointment 
and  postponement  constantly  recurring,  and  never 
seemed  to  tire  of  pouring  their  money  into  the  hopper 
of  the  mill  that  Mr.  Keely's  motor  was  turning.  Fi- 
nally it  was  stopped  by  the  death  of  the  principal  actor. 
Then,  and  not  till  then,  the  secret  was  revealed  and 
they  found  that  instead  of  an  unsuccessful  inventor, 
they  had  been  dealing  with  an  unusually  successful 
impostor.  The  hundreds  of  thousands  of  dollars  in- 
vested in  the  alleged  discovery  were  hopelessly  lost. 

The  history  of  the  Keely  motor  merely  emphasizes 
the  general  proposition  that  where  investigation  or 
publicity  of  a  proper  kind  is  refused,  the  enterprise 
should  be  avoided.  With  an  honest  and  meritorious 
enterprise  there  is  always  some  way  of  disclosing  or 


IMPORTANCE    OF    INVESTIGATION.  57 

proving  it  so  that  without  injury  to  the  enterprise, 
its  intending-  backers  may  be  properly  acquainted  with 
its  merits — or  lack  of  merit.  If  this  cannot  be  done, 
it  is  a  fair  presumption  that  something  is  wrong  with 
the  undertaking. 

The  truth  of  this  could  hardly  be  better  illustrated 
than  by  the  well-known  and  somewhat  unhappy  ex- 
perience of  sundry  Boston  capitalists  in  the  late  '90's. 
The  scheme  was  one  for  the  extraction  of  gold  from 
sea-water.  It  is  a  well-known  fact  that  gold  occurs  in 
sea-water  in  minute  quantities.  The  inventor  of  the 
"scheme"  announced  bis  discovery  of  a  process  where- 
by it  might  profitably  be  extracted.  Experienced  in 
the  art  of  extracting  gold  from  credulous  humanity — 
no  matter  what  his  ability  may  have  been  to  extract 
it  from  sea-water — the  inventor  constructed  a  myste- 
rious plant,  mostly  under  water  and  therefore  con- 
veniently out  of  the  way  of  investigation,  at  a  secluded 
spot  on  the  New  England  coast,  procured  a  supply  of 
gold  dust  and  commenced  his  operations.  Boston  was 
selected  as  the  most  promising  field  for  the  active 
operations  of  the  general  scheme  and  some  of  the 
alleged  sea-water  gold  was  freely  exhibited  in  evi- 
dence of  what  was  then  doing.  Naturally  some  unbe- 
lief was  manifested,  but  the  "doubters"  were  invited 
to  accompany  the  inventor  to  the  plant  and  see  the 
thing  done. 

The  following  extract  from  an  account  of  the 
swindle  gives  an  interesting  view  of  its  operation  : 

"Investors  and  investigators  were  always  received 
cordially ;  in  fact,  many  of  them  were  brought  up  by 
lernairan,  the  inventor   himself.        Thev  were    shown 


58  FINANCING    AN    ENTERPRISE. 

everything  except  the  secret  process.  They  examined 
the  empty  accumulators ;  they  were  told  that  these 
were  connected  with  the  apparatus  in  the  secret  cham- 
ber ;  they  saw  the  raw  material  brought  out  from  the 
accumulators  each  morning,  and  in  the  laboratory  they 
saw  the  gold  being  extracted  from  the  mass;  above  all, 
they  saw  the  ingots  or  bricks  which  were  being  sent 
down  to  the  United  States  assay  office,  and  they  saw 
the  reports  of  the  assayers  there,  declaring  the  value 
of  the  gold  and  silver  thus  received.  As  for  the  proc- 
ess, Jernagan  refused  to  give  any  explanations  of 
any  kind.  That  was  his  secret ;  they  might  see  the 
preparations,  they  might  see  the  results,  and  if  they 
were  not  satisfied  with  these,  it  could  not  be  helped. 
Usually  they  were  satisfied,  and  put  in  their  money." 

Nearly  a  million  dollars  was  put  into  the  swindle 
by  Jernagan's  victims.  Jernagan  himself  disappeared 
about  this  time,  the  secret  of  his  "process"  disappear- 
ing with  him. 

In  conclusion  it  may  be  said  that  the  ready  accept- 
ance of  claims  or  statements  without  adequate  investi- 
gation not  only  leaves  the  door  wide  open  for  the 
perpetration  of  deliberate  fraud  as  in  the  instances 
just  cited,  but  also  makes  possible  the  more  or  less 
unintentional  frauds  and  the  honest  mistakes  so  fre- 
quent in  the  history  of  financing,  resulting  in  the 
investment  of  large  sums  of  money  in  worthless,  defi- 
cient or  impossible  enterprises.  No  matter  by  whom 
the  enterprise  is  taken  up,  whether  by  the  owner,  in- 
ventor, promoter  or  investor,  nor  for  what  purpose, 
its  thorough  investigation  cannot  be  neglected  save  at 
the  most  serious  risk  of  failure  and  financial  disaster. 


I 


CHAPTER  VII. 

METHODS  AND  RESULTS  OF 
INVESTIGATION. 


The  investigation  of  an  enterprise  should  be  under- 
taken primarily  by  its  owner  or  by  the  party  who  first 
undertakes  its  financing  or  development.  A  proper 
investigation  is,  however,  equally  important  to  those 
who  come  into  the  undertaking  later,  and  unless  these 
latter  are  willing  to  accept  the  results  already  attained, 
it  is  probable  that  the  enterprise  will  be  investigated 
again — perhaps  many  times,  as  the  conditions  and  inter- 
ested parties  change.  The  investigations  already  made 
may  not  have  been  of  sufficient  thoroughness  or  scope, 
or  the  later  parties  may  wish  to  complete,  extend  or  veri- 
fy them,  or  an  entirely  new  and  independent  research 
may  be  deemed  advisable. 

When  undertaken  by  the  original  owner  or  pro- 
moter, investigation  is  usually  for  the  purpose  of  ascer- 
taining whether  the  enterprise  gives  sufficient  promise 
of  returns  to  justify  the  time,  trouble  and  investment 
involved  in   its   financing,   development   or  operation. 

Those  who  come  into  the  enterprise  later  investigate 
for  the  purpose  of  determining  the  safety  and  the 
profit  of  the  undertaking.  This  investigation  will 
naturally  extend  somewhat  further  than  that  of  the 
original  owner  or  promoter,  for  not  only  must  it  cover 

59 


^o 


FINANCING    AN    ENTERPRISE. 


the  ground  of  the  investigations  ah-eacly  made  but 
must  in  addition  include  any  changes  in  the  original 
conditions  due  to  the  work  of  the  owner  or  promoter. 

It  is  obvious  that  these  different  investigations, 
though  conducted  at  different  times  and  by  different 
parties,  have  the  same  general  end  in  view,  i.  e.,  the 
determination  of  the  value  of  the  enterprise.  The  con- 
siderations of  the  present  and  succeeding  chapters  will, 
therefore,  apply  equally  to  any  investigation,  whether 
made  by  the  owner  of  the  enterprise,  or  by  a  promoter 
considering  its  financing,  or  by  a  moneyed  man  con- 
sidering an  investment.  It  is  to  be  noted,  however, 
that  the  investigations  here  considered  apply  only  to 
the  natural  features  of  the  enterprise.  If  company 
organization,  management,  stock  issues  and  other  mat- 
ters of  the  kind  come  in  question,  the  scope  of  the 
investigation  is  considerably  extended,  as  indicated  by 
"The  Investor's  Questions,"  in  a  later  chapter  of  the 
present  work. 

When  an  investigation  is  undertaken,  it  will  usu- 
ally include  features  peculiar  to  the  particular  enter- 
prise. Beyond  these  it  will  extend  to  general  features 
which  affect  the  majority  of  enterprises  and  which, 
unless  already  known,  must  be  fully  investigated. 
These  general  features  may  be  roughly  classiiied  as 
follows : 

( 1 )  Basis  of  enterprise. 

(2)  Title. 

(3)  Output. 

(4)  Environment. 

(5)  Conditions  of  operation. 


METHODS   AND   RESULTS   OF   INVESTIGATION.  6l 

Under  each  of  these  heads  several  points  are  to  be 
considered. 

(i)      Basis  of  enterprise. 

(a)  Does  a  substantial  basis  for  the  enterprise 
exist?  This  may  seem  almost  too  elementary  a  query 
to  be  included,  yet  it  is  often  disregarded.  The  men 
who  financed  the  Keely  motor  so  liberally  took  chances 
as  to  this  and  lost  several  hundred  thousand  dollars 
in  the  "gamble."  Not  many  years  ago  stock  was  sold 
quite  extensively  in  a  South  African  diamond  mine 
that  existed  only  in  the  printed  matter  of  the  thrifty 
promoter.  Gold  mines  very  conveniently  located  in 
the  valley  of  the  Hudson  near  New  York  City,  have 
been  announced  and  financed  more  than  once  on  no 
better  basis  than  a  find  of  pyrites  or  "fools'  gold." 

(b)  If  a  process  or  invention,  will  it  do  what  is 
claimed  for  it?  This  is  merely  a  different  form  of  the 
preceding  query.  Frequently  the  construction  of  a 
working  model  or  complete  machine,  or  perhaps  the 
development  of  the  whole  enterprise,  is  necessary  be- 
fore it  can  be  answered. 

(c)  Are  similar  undertakings  in  operation  else- 
where? If  so,  some  idea — and  frequently  a  very  defi- 
nite idea — of  the  prospects  for  success  can  be  obtained 
by  a  study  of  what  has  been  accomplished  at  these 
other  places. 

(2)     Title. 

Is  the  title,  involved,  whether  deed,  transfer,  patent, 
assignment  or  bill  of  sale,  good  or  sufficient?  In  con- 
sidering a  purchase  of  ordinary  real  estate  no  pains  are 
spared  to  investigate  and  guarantee  the  title.    In  other 


62  FINANCING    AN    ENTERPRISE. 

matters  the  same  care  is  not  observed.  l)efecti\e  titles 
to  mines  are  always  tnrning  up;  inventions  are  first 
financed  and  their  patents  are  looked  up  afterward ; 
interests  are  taken  in  contracts  whicli  are  later  found 
to  convey  little  or  nothing. 

It  is  to  be  noted  that  doubtful  titles,  or  titles  that  are 
not  perfect,  are  at  times  the  best  that  can  be  secured. 
These  imperfect  titles  must  then  be  carefully  consid- 
ered to  determine  their  sufiiciency. 

(3)     Output. 

(a)  Is  there  a  sufficient  and  profitable  demand  for 
the  output?  The  output  as  here  considered  is  anything 
from  which  the  revenues  of  the  enterprise  are  derived, 
as  the  coal  from  a  coal  mine,  the  publications  of  a 
publishing  company,  or  the  transportation  facilities 
of  a  railway  system.  It  is  obvious  that  an  enterprise 
cannot  be  profitable  unless  a  sufficient  demand  exists 
for  its  output.  At  times,  however,  as  discussed  later, 
to  determine  this  point  in  advance  is  difficult  if  not 
impossible.  In  enterprises  of  a  certain  character  it 
is  frequently  the  one  unknown  cjuantity. 

(b)  Is  or  will  the  output  be  sufficient  to  support 
operations  and  supply  the  demand?  Naturally  the 
supply  must  be  large  enough  for  profitable  operations, 
or  the  enterprise  is  not  likely  to  be  undertaken ;  but 
beyond  this,  if  it  is  not  sufficient  to  meet  the  demand 
properly,  competition  is  invited  or  the  demand  itself 
may  be  discouraged  and  seek  other  sources  of  supply. 
In  either  case  failure  or  loss  might  result. 

(c)  Is  the  output  of  proper  quality  to  meet  the 
demand?     If  the  enterprise  be  a  mine,  the  quality  of 


METHODS  AND  RESULTS  OF  INVESTIGATION.         63 

its  output  is  usually  fixed  by  the  natural  conditions 
and  cannot  be  changed.  It  then  becomes  necessary 
to  ascertain  whether  this  quality  is  that  required  by 
the  demand  that  is  to  be  satisfied.  It  is  obvious  that 
this  quality  may  be  too  high  or  too  low.  For  instance, 
a  high  grade,  brittle  asphalt,  excellent  for  varnish 
and  paints,  would  not  be  at  all  suitable  for  paving. 
Or  a  low  grade  coal  carrying  much  sulphur  and  phos- 
phorus could  not  be  used  for  the  manufacture  of  a 
fine  steel,  though  it  might  be  quite  good  enough  for 
general  use.  In  most  mining  enterprises,  however, 
the  quality  cannot  be  too  high,  the  product  being  more 
valuable  as  its  purity  or  grade  increases. 

If  the  enterprise  be  the  production  of  some  manu- 
factured article,  its  quality  can  usually  be  adapted  to 
the  needs  of  its  market.  The  output  in  this  case  may, 
however,  be  fixed  as  to  quality  by  the  character  of  the 
raw  material  supply.  For  instance,  a  fine  steel  could 
not  be  produced  from  iron  ores  containing  a  high 
percentage  of  phosphorus,  nor  could  a  fine  china  be 
produced  from  a  coarse  potters'  clay, 

(d)  Can  the  product  be  turned  out  at  a  figure  that 
will  make  operations  profitable?  This  is  obviously 
one  of  the  essential  points  and  one  that  usually  re- 
quires consideration  of  a  number  of  contributing  ele- 
ments before  it  can  be  properly  answered. 

(4)     Environment. 

(a)  Are  any  necessary  raw  materials  readily  avail- 
able? The  raw  materials  must  either  be  at  hand,  or 
the  transportation  facilities  must  be  such  as  to  render 


64  FINANCING    AN    ENTERPRISE. 

their  delivery  in  quantity  and  at  low  cost  easily  pos- 
sible. 

(b)  Are  water,  fuel  and  other  necessary  supplies 
readily  accessible  and  at  reasonable  cost,  or  at  a  cost 
that  will  permit  of  successful  operation? 

(c)  Can  labor  be  secured  at  a  reasonable  price  and 
in  sufficient  quantity?  Usually  the  resident  popula- 
tion will  furnish  a  sufficient  supply.  Sometimes  this 
may  be  supplemented  by  the  importation  of  labor.  If 
the  labor  must  be  skilled,  the  matter  is  more  difficult. 
In  such  case  if  the  region  is  a  new  one  for  that  partic- 
ular industry,  the  labor  lequired  must  be  imported,  or 
perhaps  only  a  sufficient  number  of  skilled  laborers  to 
begin  on  a  limited  scale  will  be  brought  in,  and  opera- 
tions be  enlarged  thereafter  as  resident  labor  is  edu- 
cated up  to  the  requirements  of  the  enterprise. 

(d)  Are  the  markets  readily  accessible  and  are 
the  transportation  facilities  adequate  and  reasonable 
as  to  cost?  Instances  are  perhaps  familiar  to  most 
of  our  readers  where  enterprises  have  been  ruined,  or, 
conversely,  have  been  built  up  by  railroad  discrimi- 
nation. It  is  not,  therefore,  sufficient  in  itself  that 
the  markets  are  readily  available.  The  disposition  of 
the  railroads  must  be  ascertained. 

Not  only  must  rates  be  favorable  but  transportation 
capacity  must  be  adequate.  No  matter  how  favorable 
the  rates,  if  transportation  cannot  be  secured  when 
needed,  the  profits,  or  even  the  existence  of  the  enter- 
prise, might  be  seriously  endangered.  If  water  trans- 
portation is  available,  it  will  probably  be  cheaper  and 
for  many  purposes  preferable,  and  should  be  carefully 


METHODS  AND  RESULTS  OF  INVESTIGATION.         65 

investigated  even  though  rail  transportation  is  at  hand. 
If  not  needed  at  the  time,  it  will  serve  as  an  alternative 
in  case  of  subsequent  harsh  treatment  by  the  railroads. 
(5)     Conditions  of  operation. 

(a)  Is  competition  to  be  encountered?  Some  few 
enterprises  are  so  fortunate  as  to  have  no  competition. 
Usually,  however,  competition  is  more  or  less  severe, 
and  is  a  factor  which  weighs  heavily  in  considering 
the  prospects  of  success.  First  must  be  considered 
any  existing  competition.  This  competition  has  the 
very  material  advantages  of  an  established  trade  and 
income.  Then  the  possibilities  of  new  competition 
must  be  taken  into  account.  If  the  enterprise  is  a 
success,  and  other  concerns  can  come  in  and  secure 
exactly  the  same  facilities,  competition  is  usually  to 
be  expected  and  should  be  guarded  against  in  advance. 

(b)  Do  any  local  conditions  exist  which  would 
specially  affect  the  enterprise?  It  is  obvious  that  the 
vicinity  of  a  boiler  factory  would  not  be  a  desirable 
location  for  a  "rest  cure"  establishment,  nor  should  a 
meat  market  be  established  in  a  vegetarian  colony,  nor 
would  it  be  wise  to  make  Oklahoma  the  headquarters 
of  a  trust.  These  are  extreme  illustrations,  but  it  will 
be  seen  that  investigation  of  local  conditions  is  very 
essential. 


CHAPTER  VIII. 

SPECULATIVE  AND   NON-SPECULATIVE 
ENTERPRISES. 


The  scope  and  results  of  investigation  in  any  par- 
ticular case  will  depend  largely  on  the  nature  of  the 
enterprise.  For  the  purposes  of  the  present  consider- 
ation, enterprises  may  be  regarded  as  divided  into 
two  classes — non-speculative  enterprises,  in  which  the 
uncertain  quantities  may  be  so  far  eliminated  that  the 
undertaking  becomes  one  of  ordinary  business  risk; 
and  speculative  enterprises,  in  which  the  unknown 
quantities  cannot  be  determined  with  accuracy  and 
in  which  the  risk  is  greater — and  usually  much  greater 
— than  in  the  ordinary  business  enterprise. 

Speculative  enterprises  may  be  further  divided  into 
those  of  a  semi-speculative  nature  and  those  of  a 
purely  speculative  nature.  This  distinction  is  entirely 
one  of  degree.  In  the  semi-speculative  enterprises  the 
uncertain  quantities  may  usually  be  worked  out  at  a 
comparatively  small  expense,  or  perhaps  by  partial 
development,  while  in  the  purely  speculative  enter- 
prises some  pretty  full  measure  of  development  must 
be  attained  before  the  real  value  of  the  undertaking 
can  be  determined.  It  is,  naturally,  the  object  of  the 
promoters  of  a  speculative  enterprise  to  bring  it  as 
quickly  as  possible  to  the  basis  of  an  ordinary  business 

66 


SPECULATIVE  ENTERPRISES.  67 

risk — that  is,  to  the  point  where  it  passes  from  the 
realm  of  speculation  and  becomes  an  investment 
proposition. 

Enterprises  which  merely  involve  the  ordinary  busi- 
ness risk  may  usually  be  investigated  and  their  merits 
and  possibilities  determined  in  advance  with  consider- 
able accuracy.  In  many  cases  this  is  attained  at  a 
comparatively  small  cost,  and  in  the  case  of  established 
lines  of  industry,  by  the  simplest  procedure. 

For  example,  suppose  a  cotton  mill  is  to  be  estab- 
lished in  a  Southern  state.  The  general  conditions  of 
the  industry  are  well  known,  and  for  the  man  familiar 
with  the  work,  require  no  investigation.  He  will, 
however,  have  to  study  the  special  features  of  his 
particular  proposition.  He  must  ascertain  whether 
a  sufficient  supply  of  the  raw  material  is  within  eco- 
nomical reach  and  whether  labor  at  a  fair  price  is 
at  hand  or  obtainable;  also  whether  fuel  and  water 
supplies  are  available  and  whether  transportation  to 
his  markets  is  adequate  and  reasonable  as  to  cost. 
The  possibility  of  securing  a  suitable  site,  of  erecting 
the  necessary  buildings  and  of  bringing  in  the  required 
machinery,  all  at  reasonable  figures,  must  be  investi- 
gated, as  also  any  local  laws  or  conditions  specially 
affecting  the  enterprise. 

When  the  mill  man  has  determined  these  matters, 
the  details  peculiar  to  that  particular  proposition  are 
pretty  well  covered.  The  rest  is  a  matter  of  common 
expert  knowledge.  The  uncertain  quantities  have  been 
determined  and  there  remains  only  the  working  out 
of  the  equation.     This  can  be  done  with  such  accuracy 


68  FINANCING    AN    ENTERPRISE. 

that  to  establish  an  unsuccessful  cotton  mill  is,  under 
ordinary  circumstances,  a  standing  and  deserved  dis- 
grace to  those  responsible. 

In  an  undertaking  of  a  semi-speculative  nature  most 
of  the  conditions  are  still  known  or  may  be  ascertained 
by  an  ordinary  investigation,  and  the  elements  of  un- 
certainty are  usually  confined  to  a  few  points  which 
may  be  determined  without  the  expense,  trouble  and 
loss  of  time  of  a  complete  development. 

The  history  of  type-setting  machinery  affords  a 
number  of  good  illustrations  of  the  semi-speculative 
enterprise.  Here  the  only  unknown  quantity  or  uncer- 
tain element  of  the  whole  undertaking  was  the  possi- 
bility of  producing  a  machine  that  would  rival  the 
work  of  the  hand  compositor,  or  approach  it  closely 
enough  for  practical  use.  Everything  beyond  this 
was  a  matter  of  common  expert  knowledge. 

This  problem  was  undertaken  by  a  number  of  in- 
ventors. Failures  were  numerous.  The  most  conspic- 
uous of  these  was  perhaps  the  Paige  machine,  which 
was  brought  into  unusual  prominence  by  Mark 
Twain's  connection  with  the  enterprise,  as  well  as  by 
the  ingenious  intricacy  and  mechanical  beauty  of  the 
machine  itself. 

Mr.  Clemens  understood  printing  and  its  require- 
ments, but  was  a  pessimist  as  to  the  possibility  of  a 
practical  t\  pc-setting  machine.  Ilis  first  investment 
in  the  Paige  machine  was  therefore  a  comparatively 
small  one — $2,000 — and  was  made  without  investiga- 
tion ;  in  fact,  more  to  accommodate  the  promoter  than 
anything  else.      Shortly  after,   he  went  t(^   look  over 


SPECULATIVE    ENTERPRISES.  69 

the  new  machine  and  was  amazed  to  find  it  actually 
setting  and  distributing  type,  and,  in  fact,  doing  every- 
thing that  it  was  called  upon  to  do  save  the  justifica- 
tion of  the  lines. 

Mark  Twain  was  entirely  familiar  with  the  demands 
of  type-setting;  and  when  he  saw  the  machine  appar- 
ently meeting  the  requirements,  so  sure  was  he  of  the 
practicability  of  the  machine  that  he  at  once  invested 
an  additional  $3,000.  The  inventor,  however,  was  a 
visionary  and  was  not  satisfied  with  what  he  had  done. 
He  must  have  a  perfect  machine — one  that  would 
"justify."  For  five  years  he  worked  on  and  the  ma- 
chine was  still  unfinished.  He  then  called  on  Twain, 
explained  that  $30,000  was  needed  to  complete  the 
machine,  and  offered  Twain  a  half  interest  for  the 
money.  Mark  Twain  agreed,  but  stipulated  that 
thirty  thousand  dollars  must  be  the  limit,  and  the 
work  went  on. 

So  rosy  did  the  prospects  of  the  machine  seem  at 
this  time  that  the  promoters  of  the  Mergenthaler  lino- 
type offered  to  exchange  a  half  interest  in  their  ma- 
chine for  a  half  interest  in  the  Paige  machine.  The 
offer,  however,  only  confirmed  Mark  Twain's  high 
opinion  of  the  Paige  machine  and  he  did  not  care  to 
divide  honors  and  money  with  the  linotype. 

The  $30,000  was  exhausted,  and  the  machine  was 
still  incomplete.  But  $4,000  more  would  finish  it. 
The  old  machine  had  been  discarded,  and  the  inventor 
was  building  a  new  one — one  containing  twenty  thou- 
sand parts,  each  of  which  must  be  made  according  to 
its  own  special  pattern.     The  $4,000  was  exhausted 


70  FINANCING    AN    ENTERPRISE. 

but  the  calls  for  money  continued  and  were  met  by 
Mark  Twain.  The  Mergenthaler  was  then  just  com- 
ing on  the  market,  but  the  Paige  machine  was  still 
incomplete,  and  Twain  was  finding  it  more  and  more 
difficult  to  meet  the  demands  for  money.  Finally  it 
became  impossible,  and  the  machine,  representing  an 
investment  on  Twain's  part  of  almost  $190,000,  was 
dropped.  It  had  been  an  "old  man  of  the  sea"  to 
Alark  Twain  for  almost  ten  years. 

The  history  of  the  linotype  machine  is  as  striking 
an  example  of  success.  In  this  an  entire  departure 
was  made  from  the  principles  employed  in  any  prior 
type-setting  machine.  Instead  of  employing  the  ordi- 
nary type  of  the  composing  room,  the  inventor  took 
the  ground — at  that  time  entirely  novel — that  the  suc- 
cessful machine  must  make  its  own  type  and  do  it  in 
such  a  way  that  the  ordinary  difficulties  of  mechanical 
type-setting  would  be  avoided.  The  movable  type  idea 
was  therefore  abandoned.  In  its  place  was  substituted 
the  line  idea,  the  machine  when  operated  setting  type 
molds  in  place  and  on  completion  of  each  line  casting 
the  now  well-known  linotype  slug.  This  forms  in  one 
solid  piece  a  complete  line  of  type  matter,  and  from 
this  feature  the  machine  derives  its  name. 

This  very  radical  departure  from  the  usual  plan 
involved  numerous  elements  of  uncertainty.  Many 
new  functions  were  to  be  performed  by  the  machine. 
It  must  include  a  small  furnace  where  molten  type 
metal  might  be  kept  ready  for  use;  it  must  have 
matrices  for  every  letter  and  character  used  in  English 
composition ;   it   nuist    be  capable  of  arranging  these 


SPECULATIVE    ENTERPRISES.  /I 

letter  matrices  into  words,  and  these  words  must  be 
spaced  evenly  in  the  line.  The  line  of  matrices  must 
then  be  used  as  a  mold  and  this  mold  be  filled  with 
the  melted  type  metal.  The  solid  line  of  type  so 
formed  must  be  delivered  on  the  galley,  the  matrices 
making  up  the  mold  must  be  distributed  to  the  maga- 
zines from  which  they  came,  ready  to  be  used  again, 
and  all  this  must  be  done,  and  well  done,  at  a  high 
rate  of  speed.  In  short,  the  machine  must  perform 
all  the  operations  of  a  composing  room  and  of  a  type 
foundry,  at  the  dictation  of  a  single  operator.  The 
plan  was  original  and  striking.  Its  execution  was 
equally  daring  and  brilliant. 

Details  of  the  numerous  mechanical  difficulties  that 
were  overcome,  and  of  the  unfortunate  differences  be- 
tween the  inventors  and  constructors  of  the  machine, 
are  unnecessary  here.  It  is  sufficient  to  say  that  the 
idea  was  worked  out  to  operative  perfection — first  so 
that  the  machine  could  be  profitably  employed,  prin- 
cipally on  account  of  its  rapidity,  on  rough  newspaper 
work,  then,  as  the  mechanism  was  still  further  per- 
fected, on  book  work,  and  beyond  this,  yet  further, 
until  now  it  is  used  in  almost  every  branch  of  the 
art.  It  has  been  and  is  a  complete  and  striking  indus- 
trial success,  and  the  profits  to  those  connected  with  it 
have  mounted  up  into  the  millions. 

In  both  the  cases  cited,  investigation  was  con- 
ducted intelligently  and  as  far  as  was  possible.  Most 
of  the  conditions  were  known.  The  question  of  pat- 
ents was  perhaps  not  absolutely  certain,  but  was  suffi- 
ciently so  to  be  left  for  future  determination.   In  either 


72  FINANCING   AN    ENTERPRISE. 

case  the  only  material  uncertainty  was  as  to  the  con- 
struction of  an  acceptable  operating  machine.  In  both 
cases  the  possibilities,  both  of  loss  and  profits,  were 
clearly  recognized  and  accepted  in  advance.  In  the  one 
case  the  matter  was  successfully  worked  out ;  in  the 
other  it  was  not.  It  is  to  be  noted  that  in  the  case  of 
the  linotype,  as  soon  as  a  practical  operating  machine 
had  been  constructed,  the  whole  enterprise  was  re- 
moved from  the  speculative  class,  its  one  element  of 
unusual  risk  having  been  worked  out.  Thereafter  it 
was  an  investment  enterprise  depending  mainly  on 
good  management — which  was  forthcoming — and  lia- 
ble only  to  the  risks  of  ordinary  business. 

In  the  more  purely  speculative  enterprises  the  un- 
certainties extend  further  than  in  the  instances  con- 
sidered— so  far,  in  fact,  that  the  only  way  in  which 
the  value  of  the  enterprise  may  be  conclusively  deter- 
mined is  by  actual  development.  Thus  in  the  case  of 
many  mining  prospects  and  many  inventions,  the  only 
satisfactory  investigation  is  by  an  actual  trial — that  is, 
by  a  more  or  less  complete  development.  As  a  conse- 
quence, such  enterprises,  while  usually  holding  out 
large  possibilities  of  profit,  also  involve  a  very  large 
measure  of  risk,  which  can  only  be  avoided  by  avoid- 
ing the  enterprises. 

A  familiar  illustration  of  a  speculative  enterprise 
is  furnished  by  wireless  telegraphy.  In  this  case  there 
was  but  little  room  for  the  ordinary  investigation. 
The  demand  for  telegraphy  was  undoubted  and 
extensive.  The  conditions  surrounding  its  commercial 
use  were  well  known.     Patent  protection  for  wireless 


SPECULATIVE    ENTERPRISES.  73 

apparatus  could  unquestionably  be  secured  to  any 
reasonable  extent.  The  element  of  uncertainty  was 
the  possibility  of  devising  a  wireless  system  capable 
of  operating  so  effectively  and  economically  as  to 
build  up  a  business  of  its  own  or  otherwise  be  able  to 
compete  successfully  with  the  existing  ocean  cables. 

Here,  physics  as  well  as  mechanics  were  involved. 
Natural  laws  before  unknown,  and  even  now  seen 
but  darkly,  were  to  be  studied.  Mechanisms  for  their 
utilization  were  to  be  constructed.  It  is  plain  that  the 
uncertain  features  of  the  enterprise  were  material,  and 
from  their  nature,  could  only  be  determined  by  a  more 
or  less  complete  development  of  the  whole  enterprise. 

The  seriousness  of  these  uncertainties  is  shown  by 
the  fact  that  while  the  Marconi  Company  was  organ- 
ized over  fifteen  years  ago  and  active  work  has  been 
in  progress  ever  since,  no  great  financial  success  has 
yet  been  achieved.  The  value  of  wireless  telegraphy 
as  a  means  of  communicating  between  vessels  at  sea 
and  between  these  vessels  and  the  land,  and  even  across 
the  ocean,  has  been  amply  and  brilliantly  demonstrated, 
but  the  business  in  this  field  has  not  so  far  been  suffi- 
cient to  make  the  company  a  real  success. 

Further,  the  stockholders  of  the  Marconi  Company 
not  only  took  chances  on  the  success  of  wireless  teleg- 
raphy, but  specifically  on  the  success  of  the  Marconi 
system  of  wireless  telegraphy.  Their  risk  extended 
beyond  the  success  of  the  general  system.  Wireless 
telegraphy  might  be  a  failure,  beyond  its  first  limited 
application,  and  the  Marconi  people  lose.  Wireless 
telegraphy  might  be  a  success,  but  Marconi's  competi- 


74 


FINANCING   AN    ENTERPRISE. 


tors  might  distance  him  in  the  race  and  the  Marconi 
Company  still  lose;  or  possibly  new  discoveries  might 
relegate  the  whole  system  of  wireless  telegraphy  to  an 
industrial  limbo  before  the  coveted  goal  was  reached 
by  any  one.  The  enterprise  was  well  classed  as  extra- 
hazardous, and  one  which  must  needs  be  extra  pro- 
fitable to  repay  the  original  investors  for  their  risk. 


CHAPTER  IX. 

INVESTIGATION  OF  A  NON-SPECULATIVE 
ENTERPRISE. 


The  investigation  of  an  enterprise  well  within  the 
established  lines  of  industry  is  usually  a  simple  matter, 
especially  if  the  interested  parties  are  themselves 
versed  in  the  particular  line  and  capable  of  making 
the  necessary  investigation. 

When  these  conditions  do  not  obtain,  the  services 
of  experts  must  be  secured.  If  not  already  known, 
names  and  addresses  of  such  experts — in  all  those  lines 
in  which  independent  experts  are  found — may  gener- 
ally be  obtained  from  the  advertising  columns  of  the 
trade  journals  published  in  the  interests  of  the  par- 
ticular industry.  If  not,  a  request  to  the  publishers 
of  such  journals  will  usually  procure  the  desired  infor- 
mation. 

It  is  obvious  that  an  expert  employed  for  any  in- 
vestigation of  the  kind  should  be  competent  and  re- 
liable. It  may  be  that  the  expert  selected  is  well  known 
to  the  parties,  or  is  of  such  standing  and  reputation 
as  to  guarantee  his  fitness,  but  if  otherwise,  his  quali- 
fications should  be  looked  up  with  great  care.  Such 
an  investigation  is  not  usually  one  of  difficulty,  the 
expert  himself  furnishing  the  references  and  other 
data  necessary  for  this  purpose.    Nothing  should,  how- 

75 


y6  FINANCING    AN    ENTERPRISE. 

ever,  be  taken  for  granted.  If  references  are  given 
they  should  be  written  to,  or  if  statements  are  made 
as  to  work  done,  they  should  be  "checked  up."  It 
occasionally  happens  that  an  alleged  expert  will  give 
references  of  the  highest  character,  knowing  perfectly 
well  that  these  parties  will  not  endorse  him,  but  hoping 
that  no  enquiry  will  be  made. 

An  expert  will  either  undertake  the  entire  investi- 
gation of  an  enterprise  or,  if  desired,  will  confine  his 
examination  to  the  more  technical  portions,  leaving 
matters  of  ordinary  detail  for  the  parties  by  whom 
he  is  employed.  The  price  of  his  services  will  range 
anywhere  from  $io  a  day  upwards,  averaging  usually 
about  $25  per  day  and  expenses  when  an  "out-of- 
town"  investigation  is  to  be  made-  Or  a  lump  sum 
will  sometimes  be  agreed  upon  for  a  particular  exami- 
nation. These  expert  services  are  usually  worth  the 
full  price  paid,  but  as  a  measure  of  precaution  the  cost 
of  any  investigation  should  be  agreed  upon  in  advance. 

The  examination  made  by  an  expert,  unless  re- 
stricted, usually  extends  to  all  the  essential  features 
of  the  undertaking.  His  report,  especially  if  favorable 
in  its  tenor,  and  good  both  in  manner  and  form,  is 
not  only  of  immediate  value  but  is  also  most  useful 
in  any  subsequent  financing  of  the  enterprise.  If  the 
expert  is  thoroughly  qualified,  his  report  will  probably 
be  in  shape  to  be  used  for  this  or  any  other  proper 
purpose.  If  not,  it  is  in  no  way  improper  to  request 
its  re-arrangement.  The  subject  matter  of  a  report  is, 
of  course,  absolutely  and  entirely  within  the  province 
of  the  expert  and  not  to  be  interfered  with,  but  the 


INVESTIGATION NON-SPECULATIVE  ENTERPRISES.  TJ 

manner  and  form,  if  defective,  are  not  entitled  to  any 
such  respect. 

In  any  investigation  of  great  importance,  a  single 
report  is  not  usually  deemed  sufficient,  even  though  the 
standing  of  the  expert  be  high.  It  is  but  seldom  that 
an  expert  of  reputation  can  be  "purchased,"  but  he  may 
occasionally  be  swayed  by  outside  influences  and  there 
is,  of  course,  always  a  possibility  of  error.  Also  it 
frequently  happens  that  special  points  require  further 
investigation.  Therefore  when  important  matters  are 
under  consideration,  several  expert  investigations  are 
often  made. 

When  an  enterprise  has  features  entirely  new  or 
outside  the  realm  of  established  industry,  the  problem 
of  investigation  is  one  of  much  greater  difficulty,  re- 
quiring some  modifications  of  the  usual  methods  for 
its  proper  solution.  Also,  regardless  of  the  nature  of 
the  enterprise,  the  manner  of  investigation  will  vary 
to  a  greater  or  less  degree  with  the  particular  under- 
taking. The  matter  may  perhaps  be  best  illustrated 
by  a  discussion  of  methods  that  have  been  actually 
employed  in  the  preliminary  investigation  of  different 
enterprises. 

The  first  of  these  investigations  was  a  somewhat 
singular  one,  the  enterprise  partaking  of  the  marvelous 
and  mysterious  in  its  nature  quite  as  much  as  did  the 
Keely  motor  on  its  original  presentation.  It  was  in 
short  nothing  more  or  less  than  the  transmutation  of 
metals,  the  party  in  control  claiming  to  have  discov- 
ered new  natural  laws  enabling  him  to  convert  the 
ordinary  spelter,  or  zinc,   into  high-grade  brass  at  a 


78  FINANCING    AN    ENTERPRISE. 

total  cost  for  labor  and  materials  of  from  five  cents  to 
eight  cents  per  pound.  As  the  principal  constituent  of 
brass  is  copper,  the  claim,  if  verified,  amounted  to  the 
profitable  and  commercial  conversion  of  zinc  into  cop- 
per. Ordinarily  in  New  York  business  circles  a  propo- 
sition so  remarkable  w^ould  have  been  dismissed  with 
mildly  interested  scepticism.  In  the  present  instance, 
however,  the  gentleman  presenting  the  proposition  was 
at  the  head  of  an  active  and  successful  manufacturing 
enterprise  in  which  the  metals  involved  were  largely 
used  and  his  personal  intelligence,  ability  and  com- 
mercial standing  were  such  as  to  warrant  attention  and 
a  certain  amount  of  confidence  in  his  statements. 

Very  handsome  samples  of  the  transmuted  metal 
were  submitted  for  examination.  Satisfactory  explan- 
ations of  the  necessity  for  capital  were  forthcoming. 
The  offer  made  was  unusually  fair  and  straightfor- 
ward, involving  no  payment  to  the  inventor  of  any 
kind  except  from  profits.  Finally  the  process  itself 
was  vouched  for  so  strongly  and  with  such  frank  plaus- 
ibility by  the  gentleman  presenting  it  that  the  matter 
was  at  last  with  many  misgivings,  taken  up  by  the 
New  York  house  to  which  it  had  been  offered. 

The  process  was  naturally  a  secret  one,  but  the 
owner  agreed  to  make  any  demonstration  required, 
providing  only  that  the  actual  secret  of  the  process 
should  be  retained  by  him  until  final  contracts  had 
been  entered  into.  As  soon  as  these  had  been  executed, 
the  process  was  to  be  revealed  to  some  trustworthy  and 
competent  party  to  be  mutually  agreed  upon.  Then, 
under   the  supervision   of   the   two.   the   manufacture 


INVESTIGATION NON-SPECULATIVE  ENTERPRISES.  79 

would  be  at  once  begun,  and  so  soon  as  an  adequate 
output  was  secured,  the  copper  markets  of  the  world 
would  be  controlled  by  the  parties  concerned,  together 
with  resulting  wealth,  "beyond  the  dreams  of  avarice." 
The  inducements  were  attractive,  the  proposition 
was  ''right,"  the  conditions  were  reasonable  and  the 
whole  thing  then  hinged  on  the  results  of  an  investi- 
gation of  the  process.  The  parties  looking  into  the 
matter  were  promoters  who,  in  event  of  a  successful 
demonstration  of  the  process,  had  undertaken  to  se- 
cure all  necessary  capital  for  the  enterprise. 

In  this  case  most  of  the  factors  were  known  and 
the  investigation  at  once  narrowed  down  to  the  two 
points:  i.  Could  the  transmutation  be  made?  2.  Could 
it  be  made  within  the  price  named,  or  at  a  price  that 
would  make  the  process  commercial?  The  value  of 
the  whole  enterprise  would  be  established  if  these  two 
points  were  satisfactorily  settled,  and  they  were  of 
such  a  nature  that  an  absolute  demonstration  w^as 
entirely  possible. 

As  a  preliminary  step  the  samples  of  the  alleged 
transmuted  metal  were  submitted  to  a  well-known  and 
skilful  chemist  for  analysis.  It  is  to  be  noted  that  this 
step  was  out  of  the  logical  order  as  an  analysis  would 
come  in  due  course  when  brass  was  produced  in  the 
test  of  the  process.  It  was  undertaken  at  this  time 
merely  as  an  incidental  "bracer,"  only  necessary  or 
desirable  because  of  the  very  remarkable  nature  of  the 
whole  proposition.  The  results  of  the  analysis  fully 
confirmed  all  claims  as  to  the  grade   of  the  brass,  a 


8o  FINANCING   AN    ENTERPRISE. 

good-sized  nugget  of  copper  being  secured  from  the 
brassy  samples  submitted  to  the  chemist. 

The  investigation  of  the  inventor's  abihty  to  effect 
this  interesting  transformation  was  then  undertaken. 
A  preHminary  demonstration  at  his  laboratory  in  a 
nearby  city  was  completely  successful,  beautiful  sam- 
ples of  brass  being  produced,  apparently  from  ordinary 
spelter.  Something  less  open  to  manipulation  than 
this  laboratory  test  was,  however,  essential,  and  a  more 
formal  demonstration  was  therefore  arranged  for  in 
a  foundry  near  New  York.  To  make  this  the  more 
complete  and  satisfactory,  and  to  guard  against  fraud, 
all  the  preparations  were  made  and  materials  fur- 
nished— except  the  very  small  quantity  of  transmuting 
material  necessary — by  the  investigating  parties,  the 
inventor  merely  indicating  the  necessary  temperature 
of  the  furnace,  the  quantity  and  quality  of  the  spelter, 
the  size  and  kind  of  crucible  required  and  even  agree- 
ing to  accept  the  assistance  of  one  of  the  regular  foun- 
dry helpers  in  place  of  his  own  trusted  assistant.  All 
this  looked  very  open  and  fair,  everything  necessary 
was  done  and  at  the  appointed  time  the  inventor  put 
in  his  appearance. 

The  test  was  picturesque  to  an  unusual  degree.  For 
the  sake  of  privacy,  it  was  conducted  in  a  small  de- 
tached smelting  room  with  murky  walls  and  bare 
beams,  blackened  and  discolored  by  age  and  metallic 
exhalations,  and  crowded  with  the  apparatus  and  para- 
phernalia of  the  craft.  For  convenience,  the  test  was 
m^de  after  business  hours  in  the  early  gloom  of  a  win- 
ter's evening,  and  in  the  half  light  which  struggled 


INVESTIGATION NON-SPECULATIVE  ENTERPRISES.  8 1 

through  the  g^rimy  windows,  the  scene  was  strangely 
weird.  Around  the  sunken  furnace  was  a  httle  group 
of  interested  spectators  and  as,  from  time  to  time,  the 
furnace  covers  were  raised,  the  white-hot  radiance 
streamed  forth  on  their  intent  faces,  and  hghted  the 
whole  scene  with  a  dazzling  brilliance,  strikingly  Rem- 
brandtesque  in  its  effect.  This,  as  the  magician-in- 
chief  added  his  materials,  and  from  time  to  time 
sprinkled  his  mysterious  powder  into  the  crucible 
within,  rose  and  fell,  changed  color  and  was  obscured 
and  modified  by  dense  and  curiously  colored  fumes. 
Only  the  wand  and  flowing  robes  of  the  medieval  ma- 
gician were  lacking  to  complete  the  scene. 

The  scenic  effects  were,  however,  the  only  satis- 
factory results  of  the  demonstration.  Otherwise  it 
was  a  striking  failure.  At  the  end  of  the  operation 
the  spelter  was  still  spelter,  and  the  magician  in  charge 
w^as  merely  a  warm  and  perspiring  gentleman,  much 
occupied  in  trying  to  explain  the  absence  of  results. 
The  investigation  practically  ended  there,  and  the 
whole  matter  was  dropped.  It  subsequently  transpired 
that  the  gentleman  had  been  the  victim  of  his  assistant 
who  for  purposes  of  his  own  not  remotely  connected 
with  the  perquisites  of  his  position,  had  surreptitiously 
introduced  enough  copper  into  the  "home  demonstra- 
tions" to  produce  brass. 

Another  enterprise — the  development  of  an  asphalt 
deposit — was  entirely  legitimate  and  well  within  the 
scope  of  ordinary  business,  but  its  investigation  was 
rendered  difficult  by  the  centralized  condition  of  the 
industry,  the  remote  location  of  the  deposit,  the  pe- 


82  FINANCING    AN    ENTERPRISE. 

culiar  features  of  that  deposit,  and,  generally,  by  the 
lack  of  information  on  the  part  of  those  interested  as 
to  how  these  difficulties  might  be  best  met  and  over- 
come. 

The  deposit  was  located  in  the  Indian  Territory, 
which  at  that  time  had  not  been  incorporated  in  the 
State  of  Oklahoma,  and  any  clear  reading  of  its  title 
was  difficult.  It  consisted  of  an  immense  perpendic- 
ular vein  or  lead  of  sandstone  impregnated  with 
asphalt.  This  vein  was  from  50  to  200  feet  wide,  went 
down  to  an  unknown  depth,  and  extended  over  the 
country  for  a  mile  or  so  on  either  side  of  the  point 
selected  for  development. 

A  small  plant  had  been  in  operation  on  the  deposit 
but  unfortunately  had  been  burned  a  few  weeks  before 
the  investigation  was  undertaken.  The  deposit  itself 
was  developed  to  a  very  limited  extent,  the  work  con- 
sisting of  a  shaft  or  pit  some  fifteen  or  twenty  feet 
deep  with  a  crosscut  of  some  fifteen  feet  at  the  bottom. 

At  that  time,  the  general  asphalt  industry  was  con- 
trolled by  the  Barber  Asphalt  Company,  and  almost 
every  competent  asphalt  expert  in  the  United  States 
was  in  its  employ.  Also  the  various  concerns  using 
asphalt  were  so  closely  allied,  or  tied,  to  the  Barber 
interests  that  information  was  not  only  difficult  to  get, 
but  when  obtained  was  apt  to  be  absolutely  misleading. 

The  whole  matter  was  further  complicated  by  the 
fact  that  the  interested  parties — who  investigated  the 
deposit  as  promoters  with  a  view  to  its  financing — 
were  ignorant  of  the  asphalt  business  and  worst  of  all 


INVESTIGATION NON-SPECULATIVE  ENTERPRISES.  83 

were  short  of  funds  for  the  preliminary  work.  As 
will  be  seen  the  conditions  were  difficult. 

The  principal  points  to  be  decided  before  the  financ- 
ing of  the  property  could  properly  be  undertaken,  were 
about  as  follows : 

1.  What  demand  was  there  for  asphalt? 

2.  Was  the  material  of  a  nature  to  meet  this 
demand  ? 

3.  Was  the  quantity  of  crude  material  sufficient 
to  maintain  commercial  operations? 

4.  Could  the  refined  product  be  produced  profit- 
ably and  on  a  commercial  scale? 

5.  Was  the  title  good? 

6.  Could  the  property  be  secured  on  a  fair  basis? 
These  points  are  not,  and,  of  necessity,  cannot  be 

arranged  in  exact  logical  sequence.  They  were,  how- 
ever, all  vital  points,  and  in  a  preliminary  and  super- 
ficial way,  were  investigated  simultaneously  until,  in 
the  opinion  of  the  investigating  parties,  the  balance  of 
probabilities  all  along  the  line  was  sufficiently  favor- 
able to  justify  the  expense  of  a  more  thorough  inves- 
tigation. 

In  this  preliminary  work  a  discussion  of  terms  with 
the  owners  very  quickly  resulted  in  an  informal,  but 
adequate,  written  memorandum ;  a  personal  inspection 
of  the  property  convinced  the  interested  parties  that 
the  quantity  was  likely  to  be  more  than  sufficient ;  and 
a  discussion  of  the  refining  process  already  used 
seemed  to  indicate  that  some  modification  of  the  ma- 
chinery devised  for  that  process  would  give  a  practical 
method  of  reduction. 


84  FINANCING   AN    ENTERPRISE. 

All  this  was  satisfactory,  but  the  matters  of  demand, 
or  market,  and  title  were  more  difficult.  The  title 
seemed  decidedly  doubtful  and  was  only  passed  pend- 
ing further  investigation  upon  the  assurance  of  the 
owners — reinforced  by  the  statement  of  other  re- 
sponsible parties — that  the  title  was  the  best  that  could 
be  secured,  and  that  large  and  valuable  coal  mines  in 
the  general  neighborhood  had  been  operated  for  years 
under  similar  titles- 

The  question  of  the  market  for  the  material  could 
only  be  settled  far  enough  to  show  that  very  large 
quantities  of  asphalt  were  used  annually  in  the  United 
States  for  paving,  varnish,  paints  and  water-proofing 
and  that  the  price  ranged — depending  upon  the  kind 
and  quality  of  the  asphalt  and  the  veracity  and  imagin- 
ative powers  of  the  informants — from  $20  to  $200  and 
upwards  per  ton.  Any  more  accurate  determination 
of  the  matter  seemed  to  involve  the  investigation  of 
the  whole  industry,  which,  while  undoubtedly  ulti- 
mately necessary,  was  not  deemed  advisable  at  this 
stage  of  the  proceedings. 

The  results  of  the  preliminary  investigation  were 
deemed  sufficiently  favorable  to  the  property  to  justify 
a  more  searching  investigation. 

The  question  of  title  was  then  submitted  to  attor- 
neys versed  in  the  laws  and  customs  of  the  Territory. 
These  reported  that  the  title — which  was  in  the  form 
of  a  lease  from  an  Indian  Company — was  the  same 
as  that  of  other  mineral  properties  being  operated  in 
the  Territory,  and  would  certainly  hold  as  long  as 
tlie  Indians  remained  in  control;  that  should  the  United 


INVESTIGATION NON-SPECULATIVE  ENTERPRISES.  85 

States  government  take  charge — as  was  later  the  case — 
some  provision  would  undoubtedly  be  made  to  protect 
titles  of  the  kind,  but  that  even  if  this  were  not  done, 
the  lease,  provided  operations  were  in  progress  under 
it,  could  probably  be  held  under  the  doctrine  of  vested 
rights.  This  was  not  satisfactory,  but  the  title  was  the 
best  that  could  be  had  at  that  time  and  it  was  decided 
to  proceed  with  the  matter  if  the  other  conditions  were 
favorable. 

To  determine  the  question  of  quantity,  a  practical 
geologist  of  the  Southern  country  was  employed,  who, 
after  careful  investigations  and  measurements,  to- 
gether with  drilling  to  determine  depths,  reported  that 
the  quantity  was  amply  sufficient  to  justify  a  large  com- 
mercial development  of  the  property.  He  also  ex- 
pressed his  belief  that  the  asphalt  was  of  excellent 
quality,  but  not  being  a  specialist  in  this  line  his  opin- 
ion was  not  decisive. 

As  no  other  asphalt  of  exactly  that  kind  was  being 
mined  at  the  time,  the  investigation  of  the  cost  and 
method  of  producing  refined  asphalt  could  only  be 
established  by  the  erection  of  an  experimental  plant. 
This  was  undertaken,  a  small  plant  with  a  daily  ca- 
pacity of  about  half  a  ton  of  refined  material  being 
erected  on  the  site  of  the  former  works.  This  plant 
showed  that  the  asphalt  could  not  be  produced  profit- 
ably on  that  scale  at  the  prices  then  obtainable,  but 
gave  ample  grounds  for  the  belief  that  with  a  larger 
production  the  cost  could  easily  be  reduced  to  a  point 
at  which  profits  were  possible.  This  plant  also  gave 
opportunity  for  material  improvements  in  the  process 


86  FINANCING    AN    ENTERPRISE. 

and  the  character  of  the  machinery  employed  and  fur- 
nished all  necessary  samples  and  material.  It  also 
gave  the  basis  for  a  reasonably  reliable  estimate  of  the 
cost  of  a  larger  commercial  plant.  In  this  connection 
many  of  the  other  important  features  were  settled  such 
as  water  and  fuel  supply,  methods  of  mining,  facil- 
ities for,  and  cost  of  transportation,  manner  of  handl- 
ing the  asphalt,  etc. 

The  determination  of  the  value  of  the  product  was 
by  far  the  most  difficult  feature  of  the  investigation. 
The  general  asphalt  industry  was  in  the  hands  of  a 
strong  monopoly,  which  strenuously  resisted  invasion 
of  any  portion  of  the  field  and  refused  information  of 
any  kind,  save  such  as  would  mislead. 

As  the  simplest  practical  method  of  getting  at  the 
quality  and  value  of  the  material,  samples  were  sent 
to  a  number  of  different  houses  dealing  in  asphalt  and 
they  were  asked  if  the  material  could  be  used  in  their 
work,  and,  if  so,  at  what  price.  Much  information 
was  obtained  in  this  way,  most  of  it  practically  useless. 
Several  houses,  dealing  in  paint  and  varnishes  made 
from  asphaltum,  wrote  that  asphalt  such  as  submitted 
could  not  be  used  in  their  work.  This  was  literally 
true  but  they  neglected  to  add  the  helpful  information 
that  a  further  simple  distillation  to  remove  the  super- 
fluous oil  would  render  the  asphaltum  most  valuable 
for  paints  and  varnish.  Another  prominent  dealer 
wrote  that  the  samples  furnished  were  about  equal  to 
his  "D"  grade  of  asphaltum  but  quite  inferior  to 
his  "A,"  "B"  and  "C"  grades  and  that  he  thought  he 
might  be  able  to  use  the  product  if  delivered  in  New 


INVESTIGATION NON-SPECULATIVE  ENTERPRISES.  87 

York  at  $15  per  ton.  As  the  parties  investigating 
knew  nothing  about  the  "A,"  "B,"  "C"  and  "D"  grades 
of  the  dealer  and  could  not  put  the  refined  asphalt 
down  in  New  York  for  $15  per  ton,  this  report  was 
also  valueless.  Almost  invariably  the  answers  were 
such  as  to  be  most  discouraging  to  the  investigators. 
A  general  knowledge  of  the  real  situation  was  ob- 
tained finally  by  dint  of  extended  and  persistent  in- 
quiry. This  information  came  from  independent  deal- 
ers, from  the  users  of  asphalt,  from  experts,  or  filtered 
out  through  the  employees  or  ex-employees  of  the  mo- 
nopoly. A  few  asphalt  experts  were  found  who  were 
willing  to  undertake  investigations  of  the  material  and 
make  at  least  partial  reports,  which  were  reliable  as 
far  as  they  went.  Others  were  willing  to  give  guarded 
information  on  special  points  and  all  this,  in  connec- 
tion with  general  information  gathered  from  many 
other  different  sources,  gradually  pieced  out  a  reason- 
ably fair,  full  and  accurate  knowledge  of  the  whole 
situation. 

The  final  determination  of  the  matter  was  that  the 
asphalt  was  of  great  purity ;  much  resembled  the  vari- 
ety known  as  "Bermudez" ;  was  quite  suitable  for  pav- 
ing and  roofing,  and  when  refined  to  the  proper  point 
of  hardness  was  excellent  for  paints  and  some  grades 
of  varnish ;  that  it  could  be  produced  at  a  cost  of  from 
$15  to  $18  per  ton,  and  that  its  value  in  moderate  quan- 
tities would  range  delivered  between  $25  and  $40  per 
ton  according  to  condition,  location,  etc. ;  also  that  a 
sufficient  demand  could  be  worked  up  for  it  at  prices 
that  left  a  satisfactory  margin  of  profit. 


88  FINANCING    AN    ENTERPRISE. 

All  this  was  ascertained  from  what  was  practically 
the  investigation  of  the  undeveloped  property,  as  the 
little  plant  actually  erected,  and  the  very  limited  sink- 
ing and  drifting  that  was  done  could  hardly  be  called 
development.  At  the  conclusion  of  the  investigation, 
however,  the  parties  having  the  property  in  hand  were 
in  a  position  to  present  their  enterprise  to  capitalists 
with  some  grounds  for  consideration.  This  was  done 
and  after  much  discouragement  and  many  failures 
strong  and  competent  parties  were  found  who  agreed 
to  take  the  property  up,  erect  a  fair-sized  plant  and 
operate  it  on  prescribed  terms.  These  terms  were 
reasonable  and  the  arrangement  would  have  been  con- 
summated but  for  an  unfortunate  disagreement  among 
the  parties  controlling  the  property.  This  effectually 
tied  up  the  whole  enterprise,  the  little  plant  was  shortly 
after  burned  a  second  time,  and  the  property  remained 
for  years  unworked,  deserted  and  in  a  condition  of 
melancholy  desolation.  Later  it  passed  from  the 
control  of  the  original  lessors,  the  property  was  more 
fully  investigated,  oil  was  discovered,  and  it  is  now 
looked  upon  as  one  of  the  most  valuable  mineral  prop- 
erties in  that  part  of  Oklahoma. 

The  great  difficulty  in  the  development  of  this  prop- 
erty lay  in  the  very  effective  opposition  of  the  monopoly 
which  then  practically  controlled  the  asphalt  business 
of  the  country.  In  an  ordinary  enterprise  this  diffi- 
culty would  not  be  encountered.  Expert  assistance,  as 
a  rule,  can  be  obtained  with  the  certainty  of  full  and 
reliable  reports,  the  general  conditions  may  be  easily 


INVESTIGATION NON-SPECULATIVE  ENTERPRISES.  89 

ascertained  by  direct  investigation,  and,  where  neces- 
sary, working  tests  can  usually  be  made  with  but  little 
trouble  or  expense- 

As  an  illustration  of  this  latter  class  of  enterprise, 
the  contemplated  development  of  a  silicate  clay  deposit 
near  Pittsburgh  may  be  briefly  considered. 

This  bed  lies  in  the  side  of  a  low  bluff  almost  abut- 
ting on  the  railroad  track  and  consists  of  an  upper 
decomposed  clay,  covering  a  lower  and  much  harder 
siliceous  clay  that  must  be  removed  by  quarrying.  The 
upper  clay  is  supposed  to  be  adapted  to  the  manufac- 
ture of  the  ordinary  fire  brick,  the  lower  hard  clay  to 
the  manufacture  of  the  very  refractory  fire  brick  re- 
quired in  the  furnaces  of  the  iron  and  coke  regions. 
The  title  to  the  property  is  unquestioned,  it  can  be  ob- 
tained on  reasonable  terms,  the  quantity  is  practically 
decided  to  be  sufficient  by  the  location  and  general 
character  of  the  beds,  the  demand  for  the  brick  is  rea- 
sonably large  and  constant  at  a  known  and  steady 
price,  and  transportation  is  at  hand  at  a  fixed  rate. 
The  only  important  points  left  for  investigation  before 
the  value  or  possibilities  of  the  enterprise  may  be  rea- 
sonably well  determined,  are  ( i )  the  suitability  of  the 
clay,  (2)  the  quality  of  the  product,  and  (3)  the  cost 
of  production. 

The  nature  and  value  of  the  clay  can  be  easily  and 
cheaply  settled  by  sending  a  sufficient  quantity  of  the 
material  to  brick-yards  which  are  near  at  hand,  where 
it  may  be  worked,  molded  and  burned  with  the  appar- 
atus and  equipment  there  in  use.  If  these  near-by 
brick-yards  decline  to  assist  in  the  establishment  of  a 


90  FINANCING    AN    ENTERPRISE. 

possible  competitor,  more  distant  brick-yards  must  be 
resorted  to  where  an  actual  trial  may  be  made  at  a  still 
very  moderate  total  cost.  In  either  case,  a  practical 
working  test  of  the  clay  is  secured  that  determines  its 
behavior  and  the  character  of  its  product  under  condi- 
tions that  hardly  permit  of  error. 

In  addition  to  this,  however,  the  nature  of  the  clay 
and  its  products  may  also  be  determined — and  should 
be  determined — by  expert  investigation  and  analysis. 
In  this  way  the  exact  composition  of  the  clay  may  be 
ascertained,  and  as  the  requisites  of  a  good  fire  clay 
are  well  known,  the  value  of  the  particular  clay  for 
this  purpose  may  be  decided  almost  as  positively  as 
by  a  working  test.  There  is  no  difficulty  in  finding 
competent  analytical  chemists  who  make  a  specialty 
of  such  work,  and  their  reports  can  be  relied  upon. 

The  general  value  of  the  finished  brick  might  be 
determined  by  an  extended  practical  test  but  may  also 
be  ascertained — and  almost  or  quite  as  certainly — by 
this  same  expert  analysis,  or,  more  properly  speaking, 
investigation.  By  actual  trials  the  expert  can  decide 
with  exactness  on  the  strength  of  the  brick,  its  dura- 
bility, resistance  to  fire  heat  and  the  other  details  of 
importance  in  this  connection. 

The  nature  of  the  clay  and  the  quality  of  the  pro- 
duct having  been  settled,  there  remains  only  the  cost 
of  production  and  the  cost  of  marketing  to  be  con- 
sidered. The  production  cost  may  be  easily  deter- 
mined. Unless  special  difficulties  are  encountered  in  the 
particular  clay,  the  cost  of  manufacture  after  the  clay  is 
taken  from  the  earth  is  a  matter  already  well  known. 


INVESTIGATION NON-SPECULATIVE  ENTERPRISES.  9I 

Special  difficulties  in  the  clay  are  not  likely  to  be  en- 
countered, but  if  they  are,  should  be  detected  both  by 
the  actual  trials  and  by  the  expert  examination.  If 
they  are  found,  the  cost  of  manufacture — if  materially 
increased  by  these  difficulties — should  be  determined 
by  working  tests  on  a  large  scale  at  neighboring  brick- 
yards. 

Granting  that  no  special  difficulties  are  discovered, 
the  only  items  in  the  production  cost  still  undetermined 
are  the  expenses  of  digging  or  quarrying  and  any  ex- 
penses of  handling  due  to  the  particular  location,  the 
local  cost  of  fuel  and  labor  being  already  well  known. 
The  quarrying  costs  may  be  determined  by  expert 
estimate  and  be  verified  by  actual  experiment.  The 
after  handling  may  also  be  estimated  by  an  expert 
with  quite  sufficient  accuracy,  as  the  whole  matter  is 
one  of  general  knowledge  in  the  industry. 

In  this  case  every  point  requiring  investigation  may 
be  decided  to  a  nicety  in  advance,  and  if  the  results 
are  favorable  and  the  prime  essential  of  good  man- 
agement can  be  secured,  the  enterprise  should  be  almost 
certainly  successful. 

An  undertaking  of  this  general  nature  may,  how- 
ever, be  greatly  complicated  by  the  introduction  of 
new  and  more  or  less  uncertain  elements,  such  as  a 
proposition  to  employ  new  and  untested  machinery, 
or  to  manufacture  brick  for  street  paving  when  the 
clay  is  untried  and  the  qualities  of  the  brick  produced 
may  only  be  determined  satisfactorily  by  extended 
tests,  or  for  the  production  of  a  new  facing  brick  of  a 


92  FINANCING    AN    ENTERPRISE. 

unique  form,  or  of  an  unusual  color,  the  popularity 
of  which  can  only  be  determined  by  actual  experiment. 
A  brick  "proposition"  bringing  in  some  of  these  dis- 
turbing features  is  discussed  in  the  succeeding  chapter. 


CHAPTER  X 

INVESTIGATION   OF  A  SPECULATIVE 
ENTERPRISE. 


As  has  been  stated,  in  the  more  speculative  enter- 
prises such  as  many  mining  propositions  and  inven- 
tions in  their  earHer  stages,  accurate  determination  of 
the  vahie  of  the  undertaking  is  impossible  in  advance 
of  development.  As  a  consequence,  such  enterprises 
usually  involve  a  very  large  measure  of  risk. 

The  investigation  of  an  enterprise  of  this  kind  can 
only  approximate  the  possibilities.  If  the  facts  deter- 
mined are  such  as  to  justify  the  development  of  the 
enterprise,  it  should  be  a  success.  If  not,  the  enterprise 
is  reasonably  certain  to  be  a  failure. 

Some  of  these  speculative  enterprises  are  so  utterly 
indeterminate  as  to  value  and  so  far  removed  from 
any  ordinary  business  operations,  that  they  can  only 
be  looked  upon  as  gambling.  Others  of  a  necessarily 
speculative  nature  are  entirely  legitimate,  the  risks 
while  great  being  justified  by  the  ends  to  be  attained 
and  the  profits  of  success.  It  may  be  noted  that — out- 
side of  manipulated  operations  or  enterprises — it  is 
usually  from  these  speculative  ventures  that  the  sud- 
den and  dazzlingly  brilliant  rewards  of  the  business 
world  are  obtained. 

The  two  great  fields  of  speculative  enterprises  are 

93 


94  FINANCING    AN    ENTERPRISE. 

mining  and  invention.  In  these  modern  days,  how- 
ever, science  has  seized  upon  the  field  of  mining  and 
has  ehminated  much  of  its  speculative  attraction. 
"Grub-staking,"  unexpected  strikes,  and  marvelous 
developments  aided  by  imagination  and  credulity  still 
serve  to  keep  up  speculative  activity,  but  as  a  rule  an 
intelHgent  man  desiring  to  engage  in  legitimate  min- 
ing— save  as  a  prospector  or  a  small  investor — secures 
the  services  of  an  expert  and  goes  in  on  a  strictly  busi- 
ness basis.  The  general  geological  formation  is  noted, 
conditions  in  surrounding  mines  are  investigated,  the 
particular  mine  or  prospect  is  carefully  studied,  its 
possibilities  are,  by  expert  premonition  and  a  dia- 
mond drill,  traced  out  and  mapped,  and  the  whole 
business  is  brought  down  to  the  basis  of  a  prosaic 
system. 

The  field  of  invention  is,  however,  still  untouched 
by  the  cold  hand  of  science.  Here  the  trained  expert 
is  not  in  control.  He  cannot  block  out  the  inventor's 
brain  and  announce  the  values  in  sight.  He  cannot 
even  make  a  reliable  prediction  as  to  what  will  be  ac- 
complished by  the  inventor,  or,  save  in  the  most 
obvious  of  cases,  by  his  invention.  Whenever  the  de- 
sign is  unique  or  conditions  are  new,  the  best  of  ma- 
chinists or  mechanical  engineers  can  do  but  little  more 
than  guess, — and  sometimes  not  even  guess  intelli- 
gently. 

For  instance,  who  could  foretell  the  future  of  the 
telephone?  Here  the  design  and  the  purposes  were 
so  entirely  beyond  all  experience  that  the  estimates 
of  its  value  were  absolutely  divergent.     Even  among 


INVESTIGATION SPECULATIVE    ENTERPRISES.       95 

those  best  qualified  to  judge,  the  opinion  was  very 
freely  expressed  that  it  would  never  come  into  general 
commercial  use.  It  is  doubtful  if  any,  even  of  its 
friends,  foresaw  in  it  one  of  the  common  necessities 
of  business  and  social  life.  The  objections  urged 
against  it, — that  it  would  be  a  nuisance  in  the  office, 
that  messenger  and  office  boys  were  entirely  adequate 
as  a  means  of  communication,  and  that  generally  the 
idea  was  visionary — are  familiar  to  us  all.  Not  even 
the  experts  were  anxious  to  invest  in  the  new  enter- 
prise in  which  every  dollar  has  since  increased  a  thou- 
sandfold. 

Take  another  instance,  along  the  same  general  lines 
but  with  a  different  termination, — that  very  interesting 
invention,  the  phonograph.  Here,  from  the  first,  a 
strong  impression  prevailed — which  it  may  be  said, 
ought  to  have  been  realized — that  the  invention  had 
a  brilliant  and  immediately  profitable  future  before  it. 
The  history  of  the  telephone  was  to  be  repeated  and 
there  was  a  rush  of  investors,  both  experts  and  ordi- 
nary people,  to  reap  the  rich  harvest.  History  was 
repeated  but  it  was  not  the  history  of  the  telephone. 
The  first  attempts  to  introduce  the  phonograph  were 
practically  failures  and  the  majority  of  the  original 
investors  lost  every  dollar  of  their  investments. 

In  this  case  the  promoters  of  the  enterprise  believed, 
and  not  without  reason,  that  the  phonograph  and  the 
related  device,  the  graphophone,  had  a  most  extensive 
and  valuable  field  in  the  business  world.  They  were 
to  be  used  in  the  office  as  an  assistant  to,  or  substitute 
for  the  stenographer.     The  idea  was  apparently  sound 


96  FINANCING   AN    ENTERPRISE. 

and  so  thoroughly  were  the  promoters  of  the  invention 
convinced  of  its  correctness  that  in  the  earher  history 
of  the  undertaking  they  actually  discountenanced  the 
use  of  the  machine  for  purposes  of  amusement  on  the 
ground  that  such  use  would  belittle  it  and  would  retard 
its  introduction  in  its  best  and  most  profitable  field, — 
the  business  office.  For  somse  reason,  however,  the 
machine  did  not  take  with  business  men, — probably 
because  it  was  not  as  well  adapted  to  their  use  as  it 
could  and  should  have  been.  Be  this  as  it  may,  as  a 
business  machine  the  invention  was  a  dismal  failure. 
A  few  lingered  in  offices  here  and  there  to  show  that 
there  was  some  virtue  in  their  commercial  application, 
and  the  effort  for  their  introduction  into  business  was 
later  taken  up  again  with  considerable  success,  but 
the  great  and  profitable  use  of  the  phonograph,  the 
graphophone  and  the  later  related  machines,  has 
proved  to  be  as  a  means  of  diversion.  It  is  in  this  line 
that  the  few  of  the  original  investors  who  really 
profited  by  their  connection  with  the  phonograph  and 
its  kindred  machines  have  made  their  money. 

While  all  this  is  entirely  true,  it  does  not  follow  that 
investigation  can  be  dispensed  with  in  the  field  of 
invention.  On  the  contrary,  it  should  be  more  rigid 
here  than  in  almost  any  other  kind  of  enterprise. 
Every  feature  of  uncertainty  should  be  removed  as 
far  as  possible,  so  as  to  reduce  the  risk  to  its  lowest 
and  clearest  terms. 

It  may  be  noted  in  passing  that  the  estimates  of  the 
inventor  himself  are  but  rarely  reliable,  and  are  to  be 
accepted  not  at  all,  or  with  much  caution — not  neces- 


INVESTIGATION SPECULATIVE    ENTERPRISES.       97 

sarily  because  of  any  intention  to  deceive  on  his  part 
but  from  the  nature  of  the  case.  An  inventor  is  of 
necessity  an  optimist.  A  pessimist  does  not  have  the 
courage  of  invention.  The  inventor  then,  an  optimist 
to  begin  with,  ignoring  adverse  conditions,  ever  on  the 
look-out  for  favorable  indications,  watchful  for  facts 
that  coincide  with  his  theories,  oblivious  of  those  that 
do  not,  staking  his  time,  his  money  and  his  efforts  on 
the  successful  outcome  of  his  design  and  of  its  value 
when  perfected,  is,  to  say  the  least,  not  an  unbiased 
judge  either  of  the  merits  or  value  of  his  invention. 
His  opinion  may  be  useful  but  it  should  only  be  taken 
with  these  conditions  clearly  in  mind. 

It  is,  of  course,  always  possible,  though  very  far 
from  probable,  that  a  proposed  mechanism  will  do  all 
that  its  inventor  claims  for  it.  It  is  also  possible  that 
it  may  prove  so  entirely  new  in  operation  and  unique 
in  construction,  that  patent  protection  is  merely  a  mat- 
ter of  application.  All  this  may  be  true,  but  it  must 
be  remembered  that  even  Solomon — who  was  quite 
willing  to  take  chances  on  occasion — expressed  doubts 
as  to  the  absolute  novelty  of  anything,  and  his  father, 
David,  in  a  somewhat  hasty  generalization,  intimated 
that  false  representation  is  common  to  all  men.  As  a 
matter  of  fact,  to  venture  money  on  the  unsupported 
anticipations  of  inventors  is  even  more  reckless  than 
"bucking  the  tiger,"  speculating  in  bucket  shops,  or 
cornering  wheat. 

An  illustration  of  the  results  likely  to  follow  any 
such  unguarded  investments  is  afforded  by  the  history 
of  a  company  organized  some  years  since  for  the  man- 


98  FINANCING   AN    ENTERPRISE. 

ufacture  of  brick.  This  conipany  based  its  very  liberal 
expectations  of  profit  on  the  merits  of  a  newly  invent- 
ed and  somewhat  extraordinary  apparatus.  As  con- 
servatively estimated  by  the  inventor,  this  mechanism 
— or  to  be  more  accurate,  this  train  of  mechanisms — 
was  to  mould,  deliver  and  bake  ordinary  building  brick 
of  fair  average  quality  at  the  astonishing  rate  of  not 
less  than  525,000  each  day.  The  net  profits  of  the  com- 
pany on  this  operation — as  figured  by  the  inventor — 
were  to  be  at  least  $5  on  each  thousand  of  brick,  giv- 
ing a  total  daily  profit  net  on  each  and  every  machine 
of  not  less  than  $2,625. 

If  the  mechanism  had  been  properly  tested  and 
demonstrated,  these  estimates  would  indeed  have  been 
impressive.  As  a  matter  of  fact,  however,  no  investi- 
gation of  any  kind  had  been  made  by  either  the  inven- 
tor or  his  associates.  The  mechanism  itself  then 
existed  only  in  the  form  of  neat  designs  on  tracing 
paper,  and,  with  a  fine  disregard  of  ordinary  business 
procedure,  patents  had  been  practically  ignored.  Ap- 
parently the  inventor  reasoned  that  the  mechanism, 
having  been  invented  by  him,  could  not  fail  to  operate 
in  accordance  with  his  intent,  and  that  for  equally 
good  reasons  it  would  undoubtedly  receive  the  fullest 
measure  of  patent  protection  whenever  he  found  time 
to  make  application. 

At  any  rate,  acting  upon  some  such  belief  and  armed 
only  with  his  designs  and  a  large  brick  which  he  used 
for  purposes  of  demonstration,  the  inventor  attacked 
a  credulous  public  successfully, — so  successfully  that 
without  further  investigation  than  an  inspection  of  the 


INVESTIGATION SPECULATIVE    ENTERPRISES.       99 

inventor's  brick  and  a  consideration  of  his  statements, 
over  $10,000  in  cash  was  placed  in  his  hands  for  im- 
mediate expenditure.  ^Phis  was  followed  by  further 
subscriptions  until  over  $30,000  was  staked  on  the 
success  of  the  somewhat  mythical  machine. 

At  this  point  it  occurred  to  a  prospective  investor 
that  it  might  be  wise  to  investigate  the  inventor's 
claims  and  the  protection  of  the  mechanism.  He  dis- 
covered the  real  conditions.  These  were  made  public 
and  had  the  effect  of  practically  killing  the  whole 
undertaking.  Subscriptions  ceased  and  shortly  there- 
after the  company  lapsed  into  a  permanent  condition 
of  innocuous  desuetude. 

The  investment  of  money  in  the  instance  just  cited, 
was  reckless  to  a  surprising  degree.  It  might,  how- 
ever, have  been  fully  justified  if  it  had  been  first  de- 
voted to  the  investigation  of  the  mechanism  and  then 
to  its  proper  protection  and  development.  Most  inven- 
tions do  require  money  to  perfect  them  and  large  sums 
are  frequently  and  necessarily  expended  for  the  pur- 
pose. Such  security  was  felt,  however,  as  to  the  opera- 
tion and  due  patent  protection  of  the  mechanism  when- 
ever the  inventor  found  time  to  attend  to  these  matters, 
that  the  major  portion  of  the  funds  subscribed  were 
expended  in  the  testing  and  leasing  of  convenient  clay 
beds,  the  erection  of  docks,  kilns  and  buildings,  and 
a  thousand  and  one  things  necessary  for  the  general 
business  of  a  brick  company;  the  construction  of  the 
apparatus  meanwhile  awaiting  the  completion  of  the 
setting  in  which  it  was  finally  to  blaze  forth  in  splendor. 

In  this  case  it  is  to  be  noted  that  the  inventor  was 


ICXD  FINANCING    AN    ENTERPRISE. 

apparently  honest  in  his  behef  and  statements.  This 
was,  however,  no  reason  for  omitting  ordinary  precau- 
tions. On  the  contrary,  a  most  rigid  investigation 
should  have  been  conducted  and  this  should  have  been 
devoted  mainly  to  the  machine  itself.  The  general 
condition  of  the  brick  industry  was  too  well  known  to 
require  special  investigation  and  this  might  properly 
have  been  omitted.  In  fact  everything  else  should  have 
been  subordinated  for  the  time  being  to  the  investi- 
gation of  the  proposed  mechanism. 

The  first  step  should  have  been  an  investigation  as 
to  patents.  This  whole  matter  might  have  been  safely 
left  in  the  hands  of  the  patent  attorneys,  and  if  their 
report  showed  that  the  mechanism  was  patentable  and 
that  no  serious  conflicting  patents  or  claims  existed, 
the  construction  of  a  demonstrating  machine  might 
have  been  begun  with  reasonable  safety.  At  the  same 
time  patent  applications  should  have  been  filed.  It  is 
possible  that  prior  and  conflicting  applications  might 
then  be  encountered  in  the  patent  oflice  which — as  ap- 
plications for  patents  are  not  open  to  examination — 
could  not  have  been  discovered  before,  or  be  drawn 
out  in  any  way  save  by  means  of  the  patent  applica- 
tion. If  serious  conflicts  developed  in  the  patent  oflice 
the  construction  work  on  the  machinery  would,  of 
course,  be  suspended  until  these  conflicts  were  over- 
come. 

The  scale  of  construction  work  would  depend  largely 
on  circumstances.  It  is  discussed  at  some  length  in 
the  succeeding  chapter.  Speaking  generally,  good 
business  policy  dictates  the  smallest  mechanism  that 


INVESTIGATION SPECULATIVE    ENTERPRISES.       lOI 

will  give  a  practical  test.  It  is  probable  in  the  case  of 
the  brick  machine  that  a  full-sized  construction  would 
have  been  required.  It  is  also  probable,  however,  that 
this  construction  need  only  have  covered  the  critical 
parts  of  the  mechanism — that  is,  the  parts  that  were 
different  from  other  existing  machines. 

While  under  construction  the  brick  machine  might 
from  time  to  time  have  been  tested  with  clay  brought 
in  for  the  purpose.  Such  testing  would  probably  be 
sufficient  to  prove  the  principles  involved  and,  if  the 
results  were  satisfactory,  justify  the  construction  of  a 
more  complete  machine  on  an  operating  scale.  Should 
there,  however,  be  any  lingering  doubts  as  to  the  prac- 
tical working  of  the  machine,  the  matter  might  have 
been  settled  by  installing  the  model  in  some  brick-yard 
and  allowing  it  to  be  operated  there  for  such  length  of 
time  as  necessary.  Such  practical  test  might  have  to 
be  paid  for,  but  usually  could  be  secured  without  fur- 
ther expense  than  the  installation  of  the  machine. 

Usually  long  before  the  completion  of  the  working 
model,  patents  would  have  been  granted,  or  so  many 
claims  allowed  that  these  public  trials  could  be  safely 
made. 

As  soon  as  the  machine  was  thoroughly  tested  and 
its  patents  secured,  the  whole  nature  of  the  enterprise 
would  be  changed.  The  speculative  or  uncertain  ele- 
ments would  be  removed  and  the  enterprise  be  brought 
to  the  basis  of  an  ordinary  business  risk.  With  a 
demonstrated  machine,  capable  of  producing  good 
brick  at  a  cost  materially  below  that  of  the  present 
machines,  the  enterprise  would  become  both  safe  and 


I02  FINANCING   AN    ENTERPRISE. 

attractive  and  would  justify  the  investment  of  almost 
any  reasonable  amount  of  money  for  development  and 
operation. 

The  proper  investigation  of  mechanical  patents  and 
patentable  devices,  and  the  determination  of  their 
values,  as  nearly  as  may  be,  is  frequently  a  matter  of 
much  difficulty.  Many  uncertain  elements  are  usually 
involved,  depending  to  some  extent  upon  the  point 
which  the  inventor  has  attained  before  the  investiga- 
tion is  begun. 

Sometimes  and  not  infrequently  an  invention  of  this 
kind  will  exist  only  in  the  brain  of  the  inventor  or  in 
more  or  less  crude  sketches.  Sometimes  he  will  have 
constructed  a  small  working  model  of  the  device  or 
of  its  essential  features.  Sometimes  his  patents  will 
have  been  secured.  Occasionally  he  will  have  gone 
still  further  and  have  constructed  a  working  machine 
on  a  commercial  scale.  The  method  of  investigation 
will  be  governed  largely  by  the  conditions  which  exist. 

\Mien  the  invention  has  merely  reached  the  stage 
of  the  design  more  or  less  completely  worked  out  by 
the  inventor,  or  even  if  a  model  has  been  constructed, 
the  first  enquiry  is  usually  as  to  the  general  value  of 
the  device.  Perhaps  enquiries  as  to  its  patentability 
might  be  instituted  at  the  same  time.  Modified  by  the 
conditions  of  any  special  case,  these  enquiries  would  be 
about  as  follows : 

( 1 )  Is  there  a  demand  for  the  invention  or  its 
output  ? 

(2)  Will  the  invention  do  the  work? 


INVESTIGATION SPECULATIVE    ENTERPRISES.       IO3 

(3)  Will  it  do  it  better  or  cheaper  than  other  ex- 
isting devices? 

(4)  Can  it  be  efficiently  protected? 

(5)  Are  the  values  determined  by  the  preceding 
enquiries  sufficient  to  justify  the  undertaking? 

Where  the  invention  is  of  a  standard  machine  such 
as  a  typewriter,  a  reaper,  or  some  mechanism  to  pro- 
duce a  standard  product  such  as  a  loom  or  a  brush- 
making  machine,  this  first  question  of  demand  may  be 
passed  without  investigation.  It  is  obviously  sufficient, 
provided  the  new  machine  possesses  merit  enough  to 
control  its  fair  share  of  the  market. 

On  the  other  hand,  where  the  device  is  obviously 
unnecessary  or  impractical  as  are  so  many  of  the  in- 
ventions that  crowd  the  pages  of  the  patent  office  re- 
ports, the  matter  will  end  with  this  first  query.  Thus 
in  a  "non-refillable"  bottle  patented  some  time  since, 
a  cartridge  or  small  bomb  is  to  be  inserted  with  the 
cork  in  such  a  manner  as  to  explode  and  blow  the 
neck  of  the  bottle  to  fragments  when  the  cork  is  drawn. 
The  device  would  undoubtedly  prevent  the  further  use 
of  the  bottle  but  does  not  seem  to  have  met  with  a 
popular  demand. 

Instances  of  inventions  that  are  equally  impractical 
or  useless  are  numerous,  but  the  records  are  also  full 
of  mechanisms  for  purposes  sufficiently  useful  in  them- 
selves but  that  could  not  possibly  work  on  any  known 
mechanical  principles,  or  for  useful  mechanisms  that 
might  be  made  to  work  but  that  would  be  inferior  to 
other  mechanisms  already  in  operation. 

Further  there  may  be  inventions  in  which  the  design 


I04  FINANCING   AN    ENTERPRISE. 

itself  is  so  unique  or  the  conditions  under  which  it  is 
used  are  so  different  from  those  usually  existing,  that 
the  estimate  of  its  demand  and  consequent  value  can, 
at  the  best,  be  little  more  than  intelligent  guessing. 
The  telephone,  phonograph  and  wireless  telegraphy, 
already  instanced,  are  cases  in  point. 

Generally,  however,  inventions  are  sufficiently  well 
within  the  boundaries  of  ordinary  conditions  to  per- 
mit of  a  fairly  intelligent  estimate  of  their  probable 
demand  and  of  their  general  value  if  successful.  As 
will  be  readily  understood,  an  estimate  of  this  kind  is 
not  intended  to  be  final,  and  in  practice  is  frequently 
far  from  accurate.  It  is  merely  to  show  roughly 
whether  a  demand  exists  or  can  be  created,  sufficient 
to  justify  the  further  investigation  of  the  device.  In 
many  cases,  however,  this  preliminary  determination 
of  the  demand  will  be  so  accurate  or  so  satisfactory 
as  to  be  final.  In  other  cases  the  matter  must  be  con- 
sidered later  in  connection  with  other  features  of  the 
invention,  before  a  satisfactory  determination  can  be 
reached. 

If  the  demand  for  the  invention  is  decided  in  its 
favor,  or  must  be  deferred  for  later  investigation  the 
next  point  concerns  its  efficiency.  Will  it  do  the  work, 
and  will  it  do  the  work  better  than  other  devices  or 
has  it  special  points  in  which  it  excels?  If  it  cannot 
meet  the  competition  of  existing  devices,  it  is  obviously 
barred.  The  puzzling  feature  here  is  frequently  found 
in  the  fact  that  a  new  mechanism  will  probably  do  the 
work  better  in  some  respects  than  existing  mechanisms 
but  no  better  or  possibly  not  as  well  in  other  respects- 


INVESTIGATION SPECULATIVE    ENTERPRISES.      IO5 

Then  the  probabihties  must  be  balanced  to  determine 
the  prospects  of  success. 

If  the  mechanism  will  do  the  work  as  well  as  exist- 
ing devices  and  the  demand  for  such  mechanism  is 
large,  and  particularly  in  the  field  of  standard  ma- 
chinery such  as  the  typewriter,  the  sewing  machine,  the 
printing  press,  etc.,  the  new  device  may  have  a  consid- 
erable future  before  it  in  spite  of  its  lack  of  special 
excellence.  Ordinarily,  however,  the  new  mechanism 
should  be  capable  at  least  of  doing  the  work  better  in 
some  special  direction,  if  any  large  measure  of  success 
is  to  be  attained.  A  cheaper  construction  enabling  it 
to  undersell  competitors,  or  a  stronger  structure  en- 
abling it  to  outlast  them,  or  some  excellence  of  out- 
put, or  it  may  be  a  general  excellence  of  construction 
and  work, — something  of  the  kind  should  exist  to 
justify  the  entrance  of  a  new  competitor  into  an 
already  well-filled  field. 

It  is  obvious,  then,  that  the  second  and  third  queries 
are  involved  when  the  matter  of  competition  enters  in 
and  must  be  determined  before  the  first  query  can  be 
finally  answered.  The  new  invention  must  not  only 
work,  but  must  work  as  well  or  better  than  mechan- 
isms already  in  the  field  or  there  will  be  no  demand 
for  it  or  its  output. 

In  the  majority  of  cases  these  points  can  only  be 
settled  by  the  construction  of  a  model  or  experimental 
machinery.  There  are  cases  where  the  principles  in- 
volved in  an  invention  are  so  clear  or  so  simple,  or  the 
mechanism  employed  so  familiar,  that  its  value  is 
obvious,  but  when  this  is  not  the  case  even  experts 


I06  FINANCING   AN    ENTERPRISE. 

will  differ  as  to  the  operation  of  a  new  device  and  as 
a  rule  nothing  demonstrates  the  practicability  of  a  new 
invention  as  well  as  an  actual  trial. 

The  writer  recalls  an  instance  in  point.  Here  the 
inventor  and  his  machinist,  who  was  then  engaged  in 
the  construction  of  a  model,  were  at  direct  variance 
as  to  the  practicability  of  a  simple  though  important 
element  of  the  mechanism.  The  inventor  stoutly  as- 
serted that  it  would  work  as  designed;  the  machinist 
as  stoutly  declared  that  it  would  not  and  could  not, 
being  contrary  to  the  laws  of  mechanics.  The  inventor 
insisted  that  the  construction  be  proceeded  with,  which 
was  grudgingly  done.  The  apparatus  worked  and  the 
machinist  had  to  readjust  his  conception  of  the  laws 
of  mechanics,  but  the  matter  could  not  well  have  been 
decided  without  an  absolute  demonstration.  The  gen- 
eral subject  of  model-making  is  discussed  in  the  suc- 
ceeding chapter. 

The  investigation  of  patents  will  probably  have  pro- 
ceeded simultaneously  with  the  general  investigation 
of  the  invention.  Here  the  investigator  unskilled  in 
patent  matters  can  do  but  little  himself  and  the  re- 
search involved  must  be  entrusted  to  attorneys  versed 
in  patent  affairs.  An  investment  of  $5  to  $10  with 
some  capable  patent  lawyer  will  usually  secure  a  search 
for  conflicting  patents  and  a  fairly  reliable  opinion 
as  to  the  patentability  of  an  invention.  Also  not  infre- 
quently the  same  lawyer — having  patent  applications 
in  view — will,  without  additional  charge,  give  an  ex- 
pert opinion  as  to  the  general  merits  and  value  of  the 
particular  invention. 


INVESTIGATION SPECULATIVE    ENTERPRISES.       IO7 

The  search  to  determine  whether  the  device  may  be 
patented,  will  bring  to  light  any  other  similar  inven- 
tions already  patented  which  may,  in  whole  or  in  part, 
conflict  with  the  invention  under  consideration,  and 
which  may  therefore  prevent  its  full  protection  by 
patent.  Occasionally  on  such  a  search  a  supposedly 
new  invention  is  found  to  be  absolutely  barred  from 
patents  by  these  prior  patented  inventions.  In  any 
such  case  the  invention  must  be  dropped  unless  it  can 
be  modified  in  some  way  to  avoid  the  claims  of  the 
existing  patents,  or  unless  some  arrangement  can  be 
made  for  the  use  of  these  other  patents.  Also  when 
applications  for  patents  are  made,  other  pending  appli- 
cations for  similar  devices,  or  for  devices  conflicting 
in  part,  may  be  discovered.  Then,  unless  these  inter- 
ferences are  decided  in  its  favor,  the  invention  is  again 
barred  in  whole  or  in  part. 

Usually,  however,  even  if  conflicting  patents  or  ap- 
plications exist,  other  features  will  be  found  in  the 
new  invention  that  do  not  conflict,  and  these  may  be 
secured  either  for  independent  use  or  for  use  in  con- 
nection with  the  conflicting  device  or  devices.  In 
such  ciise,  however,  the  value  of  the  invention  is  very 
seriously  lessened.  In  fact  it  is  but  a  portion  of  the 
undertaking  as  originally  contemplated. 

It  is  also  to  be  remembered  that  even  though  con- 
flicting applications  exist,  the  new  invention  may  es- 
tablish a  superior  right  and  defeat  the  opposing  claims, 
or  if  the  invention  is  barred  from  patent  protection 
as  to  some  of  its  parts  by  prior  patents,  the  features 
which  are  patentable  may,  as  suggested  in  the  pre- 


I08  FINANCING   AN    ENTERPRISE. 

ceding  paragraph,  be  of  value  and  well  worth  securing, 
and  also  if  barred  by  prior  patents  which  have  expired, 
the  invention  might  still  be  operated  without  patent 
protection  on  these  special  features.  It  might  even 
be  operated  without  patent  protection  of  any  kind. 
It  would  then  simply  enter  the  field  in  an  open  com- 
petition, the  best  device  to  win. 

In  most  cases,  however,  in  an  investigation  of  an 
invention,  it  is  found  to  be  patentable  in  whole  or  to 
such  a  degree  as  to  make  its  development  worth  while, 
if  the  other  features  are  sufficiently  in  its  favor,  and 
in  that  case  the  general  consideration  of  the  enterprise 
is  in  order. 

At  this  stage  of  the  investigation  the  demand  for 
the  new  device,  or  its  output,  its  operative  value  and 
its  patentability  will  all  have  been  determined  as  ac- 
curately as  the  conditions  will  permit.  The  material 
facts  as  far  as  these  may  be  secured,  are  before  the 
interested  parties  and  they  must  then  determine 
whether  the  enterprise  shall  be  abandoned  or  shall  be 
pushed  on  to  industrial  operation  with  its  resulting 
success  or  failure. 

In  many  cases  the  information  on  which  action  must 
be  based  is,  of  necessity,  woefully  insufficient.  The 
action  must  nevertheless  be  taken,  but  will  lack  the 
sound  foundation  usually  desirable  in  commercial 
undertakings.  The  enterprise  if  taken  up,  is  then  a 
speculative  one,  with  great  risks  and,  presumably, 
compensating  rewards  in  event  of  success. 


CHAPTER  XL 

EXPERIMENTAL  WORK  AND 
MODEL-MAKING. 


In  some  few  cases  the  practicability  of  an  invention 
can  be  determined  from  existing  mechanisms,  or  when 
the  device  is  very  simple,  from  the  general  principles 
upon  which  the  mechanism  is  to  operate.  Usually, 
however,  a  model  or  an  experimental  construction  will 
be  found  necessary. 

It  is  but  seldom  that  this  model  or  construction  work 
is  completed  on  the  lines  first  laid  down  or  at  the  esti- 
mated cost.  Almost  invariably  something  defective  is 
found  that  must  be  remedied,  or  an  improvement  occurs 
to  the  inventor,  or  some  change  in  the  general  design 
is  found  advisable.  Even  when  the  model  is  built  on 
the  lines  of  the  first  plans,  it  is  usually  the  case  that  the 
workmen  take  more  time  than  was  expected,  or  that  a 
higher  grade  of  workmanship  is  required,  or  that  more 
expensive  material  must  be  used,  or  that  incidentals 
come  in  that  were  not  at  first  included.  Because  of 
this,  the  construction  cost  of  models  and  experimental 
machines  has  an  alarming  tendency  to  soar  far  beyond 
the  estimates  and  the  expectations  of  the  interested 
parties,  and  in  undertaking  any  work  of  the  kind  a 
liberal  margin  for  unexpected  expense  and  modifica- 
tions of  the  original  design  should  always  be  allowed. 

109 


no  FINANCING   AN    ENTERPRISE. 

The  writer  recalls  an  instance  in  his  own  experience 
where  the  whole  cost  of  a  small  apparatus  was  esti- 
mated by  the  machinist  at  between  $ioo  and  $200. 
The  work  was  started,  the  most  doubtful  element  of 
the  mechanism  being  taken  up  first.  Before  this  one 
feature  was  worked  out,  the  expenditures  had  run  up 
to  $125  and  the  main  portion  of  the  machine  had  not 
been  touched.  At  that  time  the  estimated  cost  of  the 
remaining  work — revised  in  the  light  of  the  experi- 
ence already  gained — called  for  some  $500  more. 
There  were  no  material  changes  in  the  design  nor  were 
there  any  improper  charges.  The  excessive  cost  was 
caused  almost  entirely  by  the  greater  difficulties  and 
the  much  more  detailed  work  found  necessary  in  actual 
construction  than  was  considered  requisite  when  the 
estimates  were  made. 

It  should  be  noted,  however,  that  occasionally  an 
unscrupulous  machinist,  with  full  knowledge  of  the 
fact,  will  give  an  original  estimate  entirely  insufficient 
for  the  proposed  mechanism.  He  does  this  for  the 
purpose  of  making  a  first  attractive  figure  that  will 
secure  the  work,  feeling  sure  that  if  the  inventor  once 
begins,  he  will  not  give  up  even  though  the  cost  does 
run  far  beyond  the  estimate.  The  practice  is  to  be 
guarded  against.  It  not  only  savors  of  dishonesty  and 
is  in  itself  a  good  reason  for  avoiding  the  particular 
machinist,  but  its  operation  is  apt  to  be  very  discon- 
certing when  funds  for  experimental  work  are  lim- 
ited. 

The  usual  arrangement  for  experimental  work  and 


EXPERIMENTAL    WORK    AND    MODEL-MAKING.       I  I  I 

model-making  is  a  charge  for  the  time  and  material 
required,  the  time  charges  ranging  from  50c.  to  80c. 
an  hour,  or  even  higher,  according  to  the  conditions 
and  the  skill  of  the  machinist.  Materials  are  sup- 
posedly paid  for  at  cost. 

This  arrangement  usually  works  well.  Occasionally, 
it  is  true,  machinists  are  found  who  take  advantage  of 
the  situation  and  charge  up  time,  material  and  inci- 
dental expenses  improperly.  It  is  very  difficult  and 
frequently  impossible  to  dispute  such  charges  and  the 
only  satisfactory  course  in  such  a  case  is  to  transfer 
the  work  to  another  and  more  reliable  machinist.  Be- 
fore this  is  done,  however,  and  before  any  suspicions 
are  seriously  entertained,  a  very  careful  investigation 
of  the  particular  matter  should  be  made.  Charges 
which  are  entirely  proper  have  a  way  of  mounting  up 
that  is  most  surprising  to  those  not  familiar  with  the 
uncertainties  and  vexations  of  experimental  work. 
Usually  when  fraud  is  charged  in  matters  of  this  kind, 
the  unexpected  cost  is  merely  an  incident  of  the  work 
that  would  have  been  anticipated  by  one  conversant 
with  model-making. 

Experimental  work  is  sometimes,  though  rarely, 
taken  under  contract  by  the  machinist  at  a  fixed  total 
cost.  The  plan  is  not  satisfactory.  Such  a  contract 
cannot  well  cover  changes  in  the  original  design,  or 
guarantee  its  successful  operation,  or  call  for  anything 
further  than  the  construction  of  the  machine  in  accord- 
ance with  the  designs  as  submitted  to  the  machinist. 
If  modifications  are  necessary,  if  new  ideas  are  brought 


112  FINANCING   AN    ENTERPRISE. 

in  or  materials  are  changed,  it  is  at  the  expense  of  the 
party  for  whom  the  work  is  being  done  and  all  this 
opens  a  wide  door  for  excessive  cost,  dissatisfaction 
and  disagreement.  Also,  as  a  matter  of  ordinary  pru- 
dence the  machinist  must  charge  a  sufficient  margin 
over  his  estimated  cost  to  cover  all  possibilities,  and 
as  he  is  very  fully  aware  of  the  uncertainties  of  exper- 
imental work,  this  allowance  will  usually  be  far  beyond 
the  actual  cost, — so  much  so  that  there  would  be  a 
distinct  saving  in  having  the  work  done  under  the 
usual  arrangement. 

As  a  rule,  the  smaller  shops,  if  their  facilities  are 
at  all  adequate,  are  to  be  preferred  to  the  larger  estab- 
lishments for  experimental  work.  The  larger  shops 
are  generally  much  better  equipped  but  any  particular 
job  does  not,  as  a  rule,  receive  the  same  individual 
attention  from  the  skilled  machinists  of  the  establish- 
ment as  in  the  smaller  shops,  and  waste  of  both  time 
and  material  is  much  more  likely  to  occur.  It  must 
be  said,  however,  that  there  are  exceptions  to  this  rule 
where  both  better  attention  and  more  economical  work 
are  secured  in  the  larger  establishments. 

When  funds  are  limited  and  experimental  work  is 
to  be  undertaken,  a  trustworthy  machinist  should  be 
selected,  the  matter  be  laid  before  him  fully  and  his 
advice  taken  as  to  the  best  course  to  pursue.  Fre- 
quently it  is  possible  by  the  construction  of  a  few  of 
the  new  or  more  essential  features  of  the  device  to 
prove  the  principles  involved,  and  to  thereby  gain  all 
the  advantages  of  a  demonstration  with  but  a  fraction 


EXPERIMENTAL    WORK    AND    MODEL-MAKING.       II3 

of  the  expense  involved  in  the  construction  of  a  com- 
plete machine. 

In  the  demonstration  of  any  complex  apparatus, 
provision  is  always  made  for  heavy  expenditures  in 
experimental  work.  If  a  new  typewriter  is  to  be 
brought  out,  an  allowance,  according  to  the  complex- 
ity of  the  machine,  of  from  $25,000  to  $100,000  for 
experimental  work  and  the  construction  of  machinery 
for  the  manufacture  of  its  parts,  is  considered  reason- 
able. One  of  the  simpler  typewriters  could  undoubt- 
edly be  worked  out  at  a  very  much  less  cost,  but  it 
may  be  safely  stated  that  no  one  of  the  standard  type- 
writers has  cost  less  for  experimental  work  and  ma- 
chinery for  the  manufacture  of  its  parts,  than  the  larger 
amount  mentioned.  Most  of  them  have  cost  more. 
The  estimated  cost  for  working  out  a  type-setting  ma- 
chine runs  even  higher.  As  stated  in  the  American 
Dictionary  of  Printing  and  Bookmaking,  "almost  any 
type-setting  machine  will  require  the  expenditure  of 
from  forty  to  eighty  thousand  dollars  before  any 
printer  will  be  found  bold  enough  to  make  a  trial  of 
it  in  his  office,  and  as  much  more  before  it  is  reason- 
ably perfect."  The  Paige  type-setting  machine,  re- 
ferred to  in  Chapter  VIII,  cost  over  two  hundred 
thousand  dollars,  and  was  not  then  a  practical  ma- 
chine. 

On  the  other  hand,  models  of  small  or  simple  mech- 
anisms, or  perhaps  parts  of  these  mechanisms,  are  fre- 
quently made  at  an  expense  of  a  few  dollars.  In  many 
cases  the  inventor  himself  is  able  to  construct  the  work- 
ing model,  thus  avoiding  most  of  the  expense  of  ex- 


114  FINANCING    AN    ENTERPRISE. 

perimental  work.  Occasionally  a  device  is  so  simple 
and  so  obvious  as  to  require  no  work  of  the  kind. 
As  a  general  rule,  experimental  work  and  model- 
making  should  be  on  the  smallest  scale  that  will  satis- 
factorily demonstrate  the  mechanism.  While  this  is 
true,  it  must  always  be  borne  in  mind  that  the  opera- 
tions of  a  small  machine  may  be  misleading.  Rough- 
nesses or  uncertainties  of  operation  that  seem  of  but 
little  importance  in  a  small  machine  may  be  empha- 
sized into  fatal  defects  in  a  larger  machine,  and  con- 
nected features  that  hardly  enter  into  consideration  of 
the  small  machine  may  become  so  essential  in  the 
operation  of  the  larger  machine  as  to  destroy  its  prac- 
tical utility. 

For  the  reasons  mentioned  or  sometimes  because 
of  the  nature  of  the  mechanism,  construction  must  at 
times  be  on  an  operating  scale  from  the  first,  but  the 
general  rule  still  holds  that  in  developing  or  investi- 
gating a  mechanical  invention  the  first  construction 
should  be  the  smallest  and  cheapest  that  will  give  a 
real  test  of  the  principles  and  the  mechanism  involved. 
It  is  almost  inevitable  that  the  new  device  will  require 
many  changes  of  the  first  design,  and  will  show  many 
possibilities  of  improvement  before  its  working  form 
is  achieved,  and  most  of  this  can  be  secured  by  the 
construction  and  operation  of  the  first  small  model. 
Then  after  the  principles  and  operations  of  the  new 
device  have  been  demonstrated  and  the  best  method 
of  construction  has  been  determined,  this  first  appar- 
atus may  be  ''scrapped"  if  necessary,  and  an  operating 
machine  be  built. 

This    rule    is   one    frequently   violated.      Inventors 


EXPERIMENTAL    WORK    AND    MODEL-MAKING.       II5 

are  prone  to  over-confidence,  and  are  often  so  sure  of 
the  operation  of  their  untried  inventions  that  they 
insist  on  full-sized  models.  Sometimes  this  is  wise 
but  in  most  cases  it  is  reckless  extravagance.  The 
writer  has  in  mind  an  improvement  in  printing  presses 
whereby  the  whole  character  of  the  present  press  was 
to  be  changed.  The  plan  looked  plausible.  Hand 
tests  showed  excellent  results.  It  was  then  proposed 
that  a  small  working  model  should  be  constructed  at 
the  expense  of  a  few  hundred  dollars  to  prove  the 
correctness  of  the  principle.  The  inventor,  however, 
insisted  that  the  principle  had  been  proven  by  the  hand 
tests  and  that  a  full-sized  cylinder  press  should  be 
purchased  and  adapted  to  the  new  mechanism.  The 
press  was  bought,  the  upper  works  were  taken  off,  the 
bed  planed  down,  the  new  attachments  constructed  and 
put  in  place,  and  the  machine  was  ready  for  operation. 
The  result  was  an  absolute  failure,  at  a  total  cost  of 
some  $2,000.  Not  only  was  this  unnecessary  expense 
incurred,  but  the  writer  believed  then  and  still  believes 
that  the  general  principle  was  correct  and  that  if  it 
had  been  worked  out  on  a  small  scale  with  the  num- 
erous experiments  and  changes  of  mechanism  then 
possible,  the  invention  might  have  been  brought  to  a 
successful  and  most  profitable  issue. 

Another  somewhat  similar  instance  was  the  con- 
struction of  an  apparatus  designed  to  compress  the 
walls  of  brass  cylinders,  the  pressure  required  being 
peculiar  and  difficult  to  secure.  Several  plans  were 
suggested  but  the  inventor  finally  decided  on  a  piston 
or  plunger  coming  down  into  a  steel  cylinder,  tiie  brass 
cylinder  being  first  fitted  into  the  steel  cylinder  so  that 


Il6  FINANCING    AN    ENTERPRISE. 

when  the  piston  came  down  the  brass  would  be  com- 
pressed between  the  piston  head  and  the  walls  of  this 
cylinder.  The  idea  struck  the  inventor  so  favorably 
that  he  decided  a  full-sized  working  machine  should 
be  made  at  once.  The  machine  was  accordingly  con- 
structed with  a  height  of  some  forty  feet  and  a  cost 
of  $8,000.  When  completed  the  apparatus  was  tried 
and  found  to  compress  the  brass  cylinder  very  success- 
fully but  the  piston  wedged  so  firmly  whenever  it 
came  down  that  a  hydraulic  press  was  necessary  to 
force  it  up  again.  As  such  an  arrangement  was  im- 
practical, the  whole  device  was  abandoned  for  a  sim- 
pler method  and  was  a  total  loss  except  as  junk.  The 
result  should  have  been  attained  at  an  expense  of  a 
few  hundred  dollars. 

Another  instance  that  perhaps  illustrates  this  point 
is  found  at  the  little  town  of  Edison,  which  for  a  num- 
ber of  years  played  the  role  of  the  deserted  village 
in  a  remote  spot  in  New  Jersey.  Here  an  enormous 
and  costly  plant  was  erected  for  the  reduction  of  the 
low  grade  iron  ores  which  are  found  in  quantity  in 
the  neighborhood.  The  process  used  was  an  untried 
one,  devised  by  the  noted  inventor  after  whom  the 
town  was  named,  and  involved  a  number  of  novel 
features,  requiring  the  construction  of  new  and — as 
worked  out  at  Edison — enormously  expensive  mech- 
anisms. 

The  scale  of  the  whole  undertaking  was  magnifi- 
cent. A  town  for  the  accommodation  of  the  work- 
men was  erected  around  the  works.  A  special  rail- 
road was  built  to  the  place  with  a  neat  station  and 
freight  house.     An  electric  light  plant  was  installed 


EXPERIMENTAL    WORK    AND    MODEL-MAKING.       11/ 

for  use  in  the  works  and  to  supply  the  town.  A  post- 
office,  stores,  a  school-house  and  church  were  erected. 
The  works  themselves  were  among  the  largest  in  the 
country,  covering  many  acres  of  ground,  and  at  the 
time  they  were  in  operation  contained  some  of  the 
most  ponderous  mechanisms  ever  constructed. 

Everything  necessary,  or  supposed  to  be  necessary, 
was  installed  with  a  striking  disregard  of  expense,  but 
the  undertaking  could  not  be  brought  to  a  commercial 
success  and  the  works  were  closed.  At  the  present 
time  the  place  is  dismantled.  The  costly  machinery 
has  been  sold  for  scrap  iron,  the  immense  buildings 
have  gone  to  ruin,  most  of  the  houses  have  been  re- 
moved, the  mine  is  a  vast  pit  of  water,  and  a  gen- 
eral air  of  rust  and  failure  pervades  the  entire  coun- 
try side. 

It  may  be  said  that  in  this  case  the  interested  parties 
claim  that  the  process  was  a  success  and  that  the 
apparent  failure  was  caused  by  the  opening  of  the 
immense  iron  deposits  of  the  lake  regions  and  the 
introduction  of  processes  by  which  the  production 
cost  of  this  competing  iron  was  greatly  reduced.  Be 
this  as  it  may,  the  fact  remains  that  between  five  and 
ten  million  dollars  were  expended  without  any  visi- 
ble results  save  vast  and  rapidly  wasting  ruins,  and 
while  there  may  have  been  reasons  that  warranted 
this  tremendous  expenditure,  it  seems  hardly  possible 
that  the  process  could  not  have  been  tested  on  a 
smaller  scale  and  at  a  mere  fraction  of  the  cost  actu- 
ally incurred.  Apparently  it  was  experimental  work 
on  a  gigantic  and  unreasonable  scale. 


PART  III.  PROTECTION  OF  AN  ENTERPRISE. 


CHAPTER  XII. 
PATENTS. 


An  eminent  commander  of  the  Civil  \\'ar,  abun- 
dantly qualified  to  express  an  opinion,  is  credited  witii 
the  terse  but  forceful  conclusion,  "War  is  hell."  The 
general  correctness  of  the  position  is  popularly  admit- 
ted. It  is  also  admitted  that  industrial  competition 
is  a  form  of  war. 

The  reason  for  the  clean-cut  separation  that  usually 
exists  between  the  private  and  the  commercial  life 
of  the  man  of  business,  is  not  clearly  apparent.  Just 
why  the  kindly,  helpful  and  considerate  gentleman 
of  home  life  should  by  the  brief  transition  to  his  office, 
be  converted  into  a  business  barbarian,  of  distinctly 
predatory  habits,  hard,  unscrupulous  and  commer- 
cially cruel,  is  one  of  the  anomalies  of  modern  civi- 
lization, difficult  to  explain. 

All  that  can  be  said  is  that  such  is  the  state  of  the 
case  and  such  the  nature  of  the  game  as  it  is  played. 
Possibly  it  gives  zest  to  life.  Be  this  as  it  may,  as 
most  of  us  have  to  play,  we  should,  even  if  we  do  not 
choose  to  be  commercial  savages,   play  with   a  clear 

ii8 


PATENTS.  119 

recognition  of  the  conditions  that  prevail.  Under 
these,  the  proper  protection  of  a  business  or  enter- 
prise becomes  of  paramount  importance.  We  must 
hold  what  we  have  by  every  means  at  our  command. 
The  better  the  protection,  the  more  safely  and  the 
more  satisfactorily  may  we  go  forth  to  wage  commer- 
cial warfare  with  the  outside  barbarians. 

Enterprises  are  protected  by  different  methods,  de- 
termined by  the  nature  of  the  particular  enterprise  and 
the  conditions  by  which  it  is  surrounded.  For  me- 
chanical inventions,  and  the  devices  and  processes 
with  which  it  is  possible,  the  patent  is  generally  relied 
upon  and  will  be  first  considered. 

A  patent  is  formal  evidence  that  officials  of  the 
general  government,  duly  appointed  thereto,  have  ex- 
amined the  papers  submitted  by  the  applicant;  that, 
as  far  as  they  were  able  to  ascertain,  there  were  no 
conflicting  claims  superior  to  those  of  the  patent  claims 
allowed ;  that  as  there  appeared  no  good  reason  for 
not  so  doing,  they  issued  the  patent  in  question,  and 
that  by  reason  of  such  issue  and  so  long  as  nothing 
occurs  to  prevent,  the  party  to  whom  such  patent  is 
issued  has  the  sole  and  exclusive  right  to  make,  use 
and  sell  the  invention  covered  thereby  and  to  author- 
ize others  so  to  do,  for  the  life  of  the  patent  and  for 
any  extensions  thereof. 

This  is  all  the  Government  undertakes  when  a 
patent  is  issued.  It  does  not  in  any  way  guarantee 
the  patent.  Nor  is  the  patent  by  any  means  nor  in 
any  way  a  final  and  complete  title,  nor  is  it  so  regard- 
ed— unless  so  fundamental  or  unique  in  its  claims  as 


120  FINANCING   AN    ENTERPRISE. 

to  have  no  opposition — until  it  has  been  fully  passed 
upon  in  the  courts.  It  is  a  conditional  title  to  the  in- 
vention, a  sort  of  a  quit  claim  deed.  It  is  a  certificate 
that  the  owner  has  the  best  title  known  to  the  Govern- 
ment ofificials  and  that  he  is  authorized  to  hold  pos- 
session of  the  invention  for  the  life  of  his  patent  unless 
someone  comes  along  sooner  with  a  better  title — or 
possibly  a  better  lawyer — and  ousts  him  therefrom. 
It  is  a  tentative  title  that  may  perhaps  never  be  ques- 
tioned, but  that  is  always  open  to  investigation  and 
attack  by  anyone  who  has,  or  thinks  he  has  a  supe- 
rior title. 

This  may  seem  a  somewhat  extreme  view  but  it  is 
literally  correct.  Whether  it  is  the  best  way  to  issue 
patents  is  another  question.  It  is  the  way  they  are 
issued  in  this  country  and  this  must  always  be  taken 
into  account  when  protection  is  sought  through  pat- 
ents, or  when  patents  are  bought  or  are  taken  as  valu- 
able assets,  or  when  they  form  part  of  an  enterprise. 
That  is,  a  patent  is  a  very  desirable  thing  to  have  and, 
in  perhaps  most  cases,  is  sufficient,  but  it  is  always 
liable  to  be  attacked,  and,  until  adjudication,  to  be 
overthrown,  and  for  this  reason  as  well  as  on  grounds 
of  general  prudence  and  safety,  not  only  should  the 
patent  itself  be  strengthened  in  every  possible  way, 
but  no  other  means  should  be  neglected  for  the  forti- 
fication and  protection  of  the  enterprise  which  is  based 
upon  this  patent. 

The  present  volume  is  not  intended  as  a  manual  of 
patent  practice,  but  it  may  be  briefly  said  that  the 
usual  procedure  is  first  the  selection  of  a  patent  solic- 


PATENTS.  121 

itor;  then  a  preliminary  search  of  the  patents  already 
issued  to  make  sure  that  the  invention  is  not  barred 
out  by  existing  patents;  next,  if  the  preliminary  exam- 
ination has  shown  no  serious  obstacles,  the  prepara- 
tion and  filing  of  the  patent  application,  or  applica- 
tions. 

It  is  taken  for  granted  that  a  patent  solicitor  will 
be  employed.  Theoretically,  an  attorney  is  not  abso- 
lutely essential.  The  inventor  may  obtain  a  copy  of 
the  rules  and  procedure  of  the  patent  office  contain- 
ing forms  and  suggestions  and  prepare  and  file  his  own 
application.  Occasionally  this  is  done,  but  the  some- 
what caustic  remark  that  a  man  who  is  his  own 
lawyer  has  a  fool  for  his  client,  is  then  usually  appli- 
cable. The  patent  officials  do  not  smooth  the  way 
for  such  applicants.  They  have  sufficient  occupation 
without  unraveling  the  complexities  of  amateur  patent 
applications.  Generally  such  papers  are  returned  time 
after  time  for  correction  of  the  numerous  defects 
and  deficiencies  characteristic  of  such  documents,  until 
the  applicant  wearies  of  his  task,  or  concludes  that  the 
patent  office  is  in  league  with  the  patent  attorneys, 
or  perhaps  realizes  the  true  condition  that  the  mat- 
ter is  one  requiring  expert  attention  and  that  he  not 
being  an  expert,  cannot  draw  the  papers  properly, 
and  therefore  goes,  as  he  should  have  done  at  first, 
to  a  patent  attorney. 

Where  the  invention  to  be  protected  is  of  any  ma- 
terial value,  the  only  possible  excuse  for  an  amateur 
application  is  the  absolute  inability  to  pay  an  attor- 
ney's fees,  and  these  latter  are  usually  so  moderate — • 


122  FINANCING   AN    ENTERPRISE. 

or  will  be  made  so,  if  the  position  is  explained — that 
the  inventor  would  do  better  to  devote  his  time  to 
raising  these  fees,  than  to  be  wasting  it  upon  the  ap- 
plication. 

If  an  amateur  application  is  finally  worked  through, 
the  resulting  patent  is  viewed  with  suspicion  by  all 
intelligent  investors.  So  true  is  this  and  so  closely 
is  the  scope  and  validity  of  a  patent  dependent  upon 
the  knowledge  and  skill  with  which  it  is  drawn,  that 
the  mere  fact  that  a  first-class  and  reputable  patent 
attorney  had  charge  of  the  application  is  a  direct 
and  material  addition  to  the  strength  and  value  of 
the  patent,  and  later  to  that  of  the  enterprise  founded 
upon  such  patent. 

The  attorney's  charges  for  a  patent  application  range 
from  a  modest  fee  of  $25,  far  upward  into  the  thous- 
ands, according  to  the  complexity  of  the  case.  No 
reputable  attorney  objects  to  fixing  a  definite  figure 
for  any  particular  application,  or,  if  this  cannot  be 
done,  to  giving  a  pretty  close  approximation  of  what 
it  will  cost.  When  expenditures  must  be  kept  within 
certain  limits,  this  cost  should  always  be  determined 
before  the  case  is  put  into  the  patent  attorney's  hands. 

In  regard  to  the  selection  of  the  patent  solicitor 
or  attorney,  it  may  be  said  that  most,  if  not  all  of  the 
regular  patent  attorneys  of  the  country  are  reliable, 
and,  usually,  competent.  Of  those  solicitors  whose 
somewhat  extravagant  claims  are  advertised  so  widely 
and  of  many  of  the  patent  agencies,  such  unqualified 
endorsement  cannot  be  given.     Probably  most  of  these 


PATENTS.  123 

are  fairly  reliable;  some  of  them  have  gained  most 
desirable  reputations  by  long  years  of  first-class  work, 
but,  in  many  cases,  it  is  to  be  feared  that  the  wel- 
fare of  clients  is  not  always  their  strongest  actuating 
motive. 

It  is  but  rarely,  if  ever,  that  either  attorneys  or 
agencies  will  improperly  disclose  inventions  confided 
to  their  care.  Such  a  proceeding,  or  even  a  suspicion 
thereof,  would  effectually  end  the  career  of  any  offend- 
ing institution  or  attorney.  There  is  some  danger, 
however,  if  an  agency  or  an  attorney  of  unknown  or 
questionable  qualifications  is  employed,  that  the  appli- 
cant will  not  be  advised  to  the  best  advantage,  or  that 
the  patent  applications  will  not  be  drawn  to  secure  all 
that  might  be  had,  or  that  they  will  not  be  properly 
pushed  when  drawn.  In  short,  as  a  rule,  a  patent 
taken  out  by  a  regular  patent  attorney  is  regarded  as 
preferable  to  one  taken  out  by  one  of  the  agencies  or 
an  advertising  solicitor  of  patents.  These  latter,  even 
if  qualified,  usually  handle  such  a  mass  of  business 
that  they  cannot  do  the  same  good  work  as  does  the 
attorney  who  gives  the  application  his  individual  at- 
tention and  whose  personal  reputation  is  supposedly 
at  stake. 

It  is  not  to  be  understood  that  either  patent  attor- 
neys or  agencies,  whether  of  standing  or  otherwise, 
are  conducting  philanthropic  institutions  for  the  ben- 
efit of  inventors,  but  it  is  a  fact  that  the  services  re- 
ceived usually  extend  much  further  than  the  mere  ap- 
plication for  a  patent.  If  the  attorney  is  a  reputable 
one,  the  best  interests  of  his  client  come  before  fees, 


124  FINANCING    AN    ENTERPRISE. 

both  as  a  matter  of  professional  ethics  and  as  a  meas- 
ure of  good  pohcy.  He  will  advise  his  client  as  to 
what  patent  or  patents  are  desirable,  as  to  the  proba- 
bility of  securing  these  patents,  as  to  the  best  method 
of  procedure,  and  endeavor  to  secure  the  most  effi- 
cient protection  with  the  least  expenditure.  He  will 
frequently  go  further  and  give  an  opinion  as  to  the 
merits  and  salability  of  the  patent  itself,  which  while 
unprofessional,  is  nevertheless  expert  and  valuable. 

In  regard  to  the  personal  relations  between  the  in- 
ventor and  his  patent  attorney,  it  may  be  said  that 
the  attorney  is  usually  entirely  willing  to  explain  to 
the  inventor  any  points  of  procedure  that  are  not  quite 
clear  to  the  latter,  and  is  glad  to  discuss  in  detail  the 
invention  to  be  patented.  The  inventor  has  presum- 
ably a  knowledge  of  the  difficulties  overcome,  a  keen 
perception  of  the  excellencies  of  his  own  invention, 
and  an  insight  into  the  special  points  that  should  be 
covered,  that  even  an  expert  patent  attorney  cannot 
obtain  in  the  comparatively  short  time  devoted  to  that 
individual  application.  Hence,  the  inventor's  assist- 
ance is  valuable  and  desired. 

The  inventor  must,  however,  remember  that  the 
attorney's  time  is  one  of  his  most  important  assets  and 
that  it  should  not  be  wasted  in  unnecessary  criticism 
or  untimely  discussion.  It  is  usually  difficult  for  the 
inventor  to  realize  this  fact.  His  invention  is  so  val- 
uable and  of  such  absorbing  interest  to  him  tliat  he 
forgets  the  many  other  demands  upon  the  time  and 
attention  of  a  busy  patent  attorney,  and,  after  some 
unduly  prolonged  discussion,  ascribes  the  impatience 


PATENTS.  125 

of  this  latter  to  indifference,  when  it  is  really  caused 
by  anxiety  as  to  his  other  neglected  work. 

The  preliminary  search  or  examination  to  determine 
whether  an  invention  or  any  of  its  features  have  been 
already  patented,  is  in  most  cases  a  very  simple  and 
inexpensive  matter,  costing  from  $5  to  $10,  and  in  a 
well-equipped  office  requiring  but  a  day  or  two,  or 
even  less  time,  to  complete.  In  more  complicated 
cases,  the  cost  may  run  up  to  very  much  larger  figures, 
depending  entirely  upon  the  amount  and  difficulty  of 
the  work  involved. 

The  general  patentability  of  the  device  will  probably 
have  been  passed  upon  by  the  patent  attorney  before 
this  preliminary  search  is  undertaken,  and  the  only 
fact  established  thereby  is — when  such  is  the  case — 
that  there  are  no  obvious  conflicts  in  existing  patents 
to  stand  in  the  way  of  a  patent  issuing  for  the  par- 
ticular device.  The  patent  application  should  not  usu- 
ally be  made  until  this  matter  is  determined.  In  some 
cases,  however,  as  the  cheapest  and  best  method  of 
determining  the  facts,  the  application  will  be  made 
first  and  the  patent  office  be  left  to  work  out  any  con- 
flicts or  interferences. 

It  must  be  borne  in  mind  that  after  the  patent 
office  is  reached,  conflicts  may  be  found  in  applica- 
tions already  in  the  ofiice,  which  have  not  yet  been 
granted  and  are  therefore  not  open  to  inspection,  and 
that  such  obstacles  can  be  brought  to  light  only  by 
the  filing  of  an  application.  As  soon  as  this  has  been 
filed  the  patent  office  will  notify  the  applicant  of  any 


126  FINANCING    AN    ENTERPRISE. 

conflicts  in  pending  patents  and  he  will  then  have  an 
opportunity  to  prove,  if  he  can,  the  priority  of  his  own 
invention,  or  of  those  parts  which  are  in  interference. 

The  character  of  the  patent  application  will  depend 
almost  entirely  upon  the  nature  of  the  invention.  A 
fundamental  patent  covering  broadly  the  application 
of  a  general  principle,  is,  of  course,  much  to  be  desired. 
Such  a  patent,  for  example,  was  the  one  granted  Bell 
for  the  telephone  which  covered  the  transmission  of 
articulate  sound  by  means  of  electrical  impulses. 
This  was  indeed  basic,  applying  to  every  practical 
method  of  transmitting  articulate  sound  by  electricity 
and  securing  the  field  to  Bell  and  his  licensees  as  an 
absolute  monopoly  for  the  life  of  his  patent.  This 
patent  was  fiercely  attacked  but  was  upheld — whether 
justly  or  not  is  beyond  the  scope  of  this  volume — and 
as  long  as  that  one  principle  was  effectually  upheld, 
the  telephone  field  was  theirs.  Others  invented  very 
excellent  telephones  and  various  improvements  in  tel- 
ephones, but  all  were  subservient  to  that  jealously 
guarded  principle  and  could  not  be  used  during  the 
life  of  this  basic  patent  without  the  somewhat  costly 
consent  of  its  holders. 

Where  it  is  not  possible  to  secure  such  a  basic  patent, 
or  where  the  principle  so  secured  is  merely  a  feature 
and  not  sufficient  to  properly  cover  and  protect  the 
whole  invention,  the  present  day  practice  is  to  make 
multitudinous  claims  on  the  principles  and  combina- 
tions employed  and  to  make  many  applications  for 
patents  on  the  different  portions  of  the  machines. 
Thus  in  the  case  of  an  automatic  perforating  machine, 


PATENTS.  127 

wliereby  a  paper  tape  is  perforated  with  telegraphic 
signals  and  is  later  used  to  send  these  signals  over  the 
line,  the  machine  being  operated  by  a  keyboard  much 
like  that  of  the  typewriter,  the  machine  itself  is  cov- 
ered by  a  general  patent  with  some  forty  or  more 
claims.  Another  patent  with  almost  as  many  claims 
covers  the  keyboard.  The  direct  perforating  apparatus 
is  covered  by  another  multi-claim  patent  and  so  on. 
As  high  as  seventy  or  eighty  patents  will  sometimes 
be  taken  out  on  an  important  invention,  or  on  one  that 
is  to  be  protected  to  the  fullest  possible  extent. 

Such  a  procedure  is  undoubtedly  good  business  prac- 
tice where  the  invention  is  of  material  value.  From 
the  legal  standpoint,  a  patent  of  multitudinous  claims 
would  not  usually  cover  or  be  worth  more  than  the 
ordinary  modest  patent  of  from  two  to  a  dozen  claims, 
nor  would  numerous  patents  protect  better  than  a  few. 
If,  however,  another  inventor  should  contemplate  en- 
tering that  particular  field,  it  would  be  very  discourag- 
ing to  find  it  already  thickly  covered  with  patents  and 
claims,  and,  as  the  ordinary  inventor  cannot  possibly 
distinguish  that  which  is  really  good  as  a  protection 
from  that  which  is  only  good  as  a  bluff,  the  practice 
has  a  real  "scare  crow"  value  quite  outside  and  apart 
from  any  legal  utility. 

The  Government  fees  on  patent  applications  are  $15 
at  the  time  of  filing  and  $20  when  the  patent  is  taken 
out.  After  notice  of  allowance  of  a  patent,  the  invent- 
or has  six  months  within  which  this  fee  may  be  paid 
and  the  patent  be  issued.  The  general  purpose  of  this 
six  months  of  grace  is  to  give  the  inventor  time  to 


128  FINANCING    AN    ENTERPRISE. 

make  his  applications,  if  any,  for  foreign  patents.  As 
the  patent  dates  from  the  day  of  issue — not  from  the 
day  of  allowance — it  is  customary  in  the  case  of  valu- 
able inventions  to  let  this  six  months'  period  almost 
expire  before  the  patent  is  taken  out  in  order  to  secure 
the  latest  possible  date  on  the  patent.  If  the  invention 
is  of  considerable  value,  foreign  patents  will,  of  course, 
be  applied  for  meanwhile.  The  life  of  a  mechanical 
or  process  patent  is  seventeen  years. 

It  is  almost  inevitably  the  case  that  a  device  as  first 
patented  is  in  a  condition  susceptible  of  much  improve- 
ment. If  the  invention  be  of  sufficient  value  to  justify 
it,  expert  mechanics  are  frequently  employed  to  watch 
its  operation  and  devise  improvements  upon  it,  which 
are  promptly  covered  by  patent.  Whether  experts  are 
employed  for  the  purpose  or  not,  improvements  are 
almost  sure  to  suggest  themselves  to  those  in  charge 
of  the  mechanism  and  any  such  improvements  if  of 
value  should  be  secured  by  patent.  In  this  way  valu- 
able inventions  are  frequently  controlled  long  after 
the  expiration  of  the  original  patents,  through  almost 
equally  valuable   improvements. 

It  should  always  be  borne  in  mind  that  patents 
while  very  excellent  in  themselves  are  not  by  any 
means  a  complete  protection  against  competition  or 
the  construction  of  similar,  or,  sometimes,  even  of 
the  same  device.  Defects  or  weaknesses  may  be  found 
in  the  patent,  other  methods  of  accomplishing  the 
same  result  may  almost  always  be  found,  or  the  patent 
itself  may  be  attacked  and  bodily  overthrown.  For 
this  reason,  as  has  been  said,  as  well  as  on  grounds 


PATENTS.  129 

of  general  prudence,  the  patent  should  be  strengthened 
in  every  possible  way, — by  blanket  claims,  numerous 
original  patents  and  by  subsequent  patents  on  im- 
provements. 

Patents  are  also  occasionally  subject  to  attacks 
which  can  be  only  described  as  piratical.  A  concern 
financially  strong  sees  a  weak  concern  enjoying  a  val- 
uable patent.  It  then  begins  a  deliberate  infringement. 
Suit  is  naturally  brought  by  the  owners  of  the  patent, 
but  the  advantages  here  are  all  with  the  strong.  The 
weaker  party  cannot  usually  match  the  legal  "heavy 
weights"  opposed  to  it,  nor  can  it  even  stop  the  in- 
fringement during  the  progress  of  the  suit,  save  by 
giving  heavy  bond.  If  this  is  not  possible,  the 
stronger  party  continues  its  infringement  meanwhile 
and  actually  weakens  and  injures  its  opponent  by 
means  of  its  wrongful  competition  and  its  purloined 
profits.  The  suit  itself  is  long  and  costly,  and  too 
often  right  and  justice  are  defeated  by  the  inability 
of  the  weaker  party  to  pay  the  price.  In  such  case 
the  suit  fails  from  lack  of  prosecution,  or  from  inef- 
fective prosecution.  In  either  case  the  weaker  party 
has  been  deprived  of  its  property  by  as  high-handed 
and  iniquitous  a  proceeding  as  ever  disgraced  the 
robber  barons  of  medieval  Europe. 

Of  happier  resultant  was  the  suit  of  the  Goodwin 
Film  and  Camera  Company  against  the  Eastman 
Kodak  Company,  settled  hardly  more  than  a  year  ago 
in  favor  of  the  Goodwin  Company.  Goodwin  was  a 
clerg}'man  with  a  taste  for  chemistry.  He  knew  that 
an  elastic  photographic  film  was  greatly  desired.     He 


130  FINANCING    AN    ENTERPRISE. 

knew  also  that  his  own  salary  was  sadly  inadequate, 
and  to  meet  this  condition  he  undertook  to  solve  the 
problem  of  the  flexible  film. 

Goodwin's  efforts  were  finally  successful  and  on 
May  2,  1887,  he  filed  his  application  for  a  process 
patent  for  the  flexible  film.  Then  his  troubles  began. 
For  eleven  years  his  application  was  in  the  Patent 
Office  and  was  rejected  by  five  successive  examiners. 
As  stated  in  the  final  opinion  confirming  Goodwin's 
right  to  the  process,  "The  long  delay  and  the  contra- 
dictory rulings  of  the  Patent  Office  would  have  dis- 
couraged an  inventor  who  had  not  supreme  faith  in 
the  justice  of  his  cause."  Meanwhile  the  chemist  of 
the  Eastman  Company  "discovered"  a  similar  process, 
applied  for  a  patent  in  the  early  part  of  1889,  and 
received  his  patent  before  the  end  of  the  year.  The 
Eastman  Company  thereupon  began  the  manufacture 
of  the  film  and  when,  in  1898,  Goodwin  received  his 
patent,  the  Company's  sales  were  already  large  and 
enormously  lucrative. 

Goodwin  was  able  at  this  time  to  interest  friends 
with  money  in  his  process.  At  first  they  tried  to 
adjust  matters  with  the  Eastman  Company,  but,  fail- 
ing in  this,  brought  suit.  The  litigation  was  long 
and  costly.  Begun  in  1902,  it  was  not  finally  settled 
until  the  latter  part  of  19 13 — more  than  twenty -five 
years  after  the  date  of  the  patent  application.  The 
result  was  a  complete  vindication  for  Goodwin,  who, 
however,  had  died  in  1900 — thirteen  years  before  this 
result  was  reached.  The  payments  made  by  the  East- 
man Company  in  settlement  of  the  matter  are  said 
to  have  run  well  uj)  into  the  millions  of  dcjllars. 


CHAPTER  XIII. 

TRADE-MARKS,  TRADE-NAMES  AND 
COPYRIGHTS. 


A  trade-mark  may  be  roughly  defined  as  a  distinctive 
name,  expression,  device  or  motto,  used  to  designate 
a  particular  product,  or  class  of  products,  or  line  of 
goods,  put  out  and  dealt  in  under  that  distinctive 
mark  or  designation.  Under  the  proper  conditions, 
the  parties  originating  and  using  such  distinguishing 
name  or  mark,  acquire  a  right  to  it  as  against  any 
other  attempting  to  employ  it  for  the  same  purpose. 
This  right  is  a  clearly  defined  common  law  right  and 
the  ownership  of  trade-marks  may  be  transferred  as 
may  the  ownership  of  any  other  kind  of  personal 
property. 

The  general  subject  of  trade-marks  can  be  treated 
but  briefly  here.  In  most  states,  laws  are  provided 
for  their  registration  and  there  is  also  a  national  law 
permitting  the  registration  of  trade-marks  in  the  pat- 
ent office  at  Washington.  This  registration,  whether 
State  or  National,  does  not  in  itself  vest  the  right  to 
a  trade-mark  in  the  individual,  but  is  merely  a  public 
notice  that  the  particular  trade-mark  is  being  used  and 
is  claimed  by  the  person  registering  it.  Any  right  to 
its  exclusive  use  would  exist  no  matter  whether  the 
mark  were  registered  or  not.     The  great  advantage 

131 


132 


FINANCING    AN    ENTERPRISE. 


of  registration  is  found  in  case  of  litigation.  If  other 
parties  use  the  mark  the  registered  owners — if  the 
matter  is  brought  into  the  courts — file  the  evidence 
of  registration.  This  is  considered  prima  facie  proof 
of  ownership  and  the  offending  parties  must  then 
either  show  that  they  have  a  superior  right  to  the 
ownership  of  the  mark  in  question,  or  lose  their  cause. 
If,  however,  the  mark  had  not  been  registered,  the 
burden  of  proof  is  reversed.  Then  the  complainant 
parties,  instead  of  merely  submitting  evidence  of  reg- 
istration, must  bring  proof  that  they  have  been  using 
the  trade-mark  in  question  and  that  their  use  and 
right  antedates  and  is  superior  to  that  of  the  defendant 
parties.  In  other  words,  the  registration  of  the  trade- 
mark does  not  establish  the  ownership  of  the  mark, 
but  is  prima  facie  proof  of  such  ownership,  and  any 
party  infringing  or  contesting  this  ownership  must 
prove  a  superior  right  or  relinquish  his  claims. 

The  registration  of  a  trade-mark  is  not  therefore  of 
importance  as  a  means  of  acquiring  ownership,  but 
only  as  a  public  notice  that  ownership  therein  is 
claimed,  as  a  coign  of  vantage  from  which  to  conduct 
the  fight  in  case  of  litigation,  and  as  a  measure  by 
which  the  burden  of  proof  is  shifted  to  the  opposing 
parties. 

Ownership  in  a  trade-mark  has  the  advantage  of  not 
expiring  by  time  limitation  as  does  the  patent.  It  is 
not  a  special  concession  or  reward  from  the  Govern- 
ment to  genius  or  enterprise.  It  is  merely  a  private 
right  in  and  to  a  property  created  by  the  energy  and 
ability  of  the  originator,  and,  like  any  other  property 


TRADE-MARKS,   TRADE-NAMES,   ETC.  1 33 

right,  inuring  to  the  benefit  of  the  owner  or  his  assigns 
in  perpetuity  or  until  lost  by  disuse  or  abandonment. 
The  Government  certificate  of  trade-mark  registration 
does,  it  is  true,  expire  and  must  be  renewed  from  time 
to  time,  but  the  ownership  of  the  trade-mark  does  not 
expire  as  long  as  it  is  in  active  use. 

An  established  trade-mark  is  not  infrequently  the 
most  valuable  asset  of  a  flourishing  business,  practi- 
cally representing  its  good-will.  In  many  cases,  where 
fully  established,  its  protective  value  is  actually  greater 
and  far  more  desirable  than  that  of  the  ordinary  pat- 
ent. The  respective  merits  of  the  different  methods 
of  protection  are  well  illustrated  in  the  cases  of  the 
two  well-known  and  exceedingly  profitable  pharma- 
ceutical preparations,  phenacetine  and  vaseline. 

Phenacetine  was  held  by  a  process  patent.  The  life 
of  this  patent  expired  some  years  since,  throwing  the 
manufacture  and  sale  of  phenacetine — as  phenace- 
tine— open  to  the  world  and  ending  the  long  and 
exceedingly  profitable  monopoly  enjoyed  by  the  pat- 
entees. 

Vaseline,  on  the  contrary,  is  not  protected  in  any 
way  by  patent,  but  the  name  of  the  substance,  "vase- 
line," is  owned  as  a  registered  trade-mark.  Under 
that  name  the  product  was  originally  brought  out  and 
introduced  to  its  multitude  of  users,  and  by  the  name 
alone  it  is  now^  held.  That  is,  the  process  by  which 
vaseline  is  produced  is  known  to  the  trade  generally 
and  the  substance  may  be  made  and  sold  by  anyone 
under  any  name  except  vaseline.  As  a  matter  of  fact 
it  is  largely  manufactured  and  sold  under  other  names, 
as  notably  that  of  "petroleum  jelly."     The  name  vas- 


134  FINANCING   AN    ENTERPRISE. 

eline,  is,  however,  the  exclusive  property  of  the  com- 
pany by  w^hich  it  is  registered,  and  so  well  is  this  name 
established  that  while  the  company  does  not  control 
the  entire  trade  in  the  product,  it  does  control  the  most 
profitable  portion  of  it  and  will  continue  to  do  so  as 
long  as  the  product  is  properly  made  and  properly 
kept  before  the  public  under  the  name  vaseline. 

The  holding  power  of  an  established  trade-mark  is 
surprising.  Such  a  name  stands  for  the  formula  of 
the  preparation  covered  and  all  its  qualities.  Once 
fixed  in  the  public  mind  and  properly  followed  up, 
its  displacement  is  almost  impossible.  The  only  way 
in  which  it  can  be  overthrown  is  by  the  substitution  of 
some  other  trade-marked  article  of  the  same  nature, 
and  in  this  way  only  with  extreme  difficulty  and  with 
assisting  laxness  on  the  part  of  the  owners  of  the 
established  mark.  We  all  recognize  this  in  our  per- 
sonal experience.  Some  certain  remedy  suits  us;  we 
like  a  certain  kind  of  shaving  soap;  we  are  accustomed 
to  using  a  particular  brand  of  tooth-powder,  and  we 
continue  to  buy  and  use  these  particular  articles  indef- 
initely and  without  asking  or  caring  about  anything 
else  for  the  purpose.  Other  articles  may  be  equally 
good — frequently  better — but  we  are  not  concerned, 
much  preferring  to  continue  the  use  of  those  we 
already  have. 

In  the  kitchen  Dr.  Blank's  baking  powder  has  been 
introduced.  The  cook  learns  how  to  use  it  with  excel- 
lent results,  or  results  that  she  esteems  excellent.  There- 
after no  other  baking  powder  appeals  to  her,  no  matter 
what  its  claims.  Ordinarily  she  will  not  even  try  it. 
If  she  should  be  persuaded  to  do  so,  not  understand- 


TRADE-MARKS,  TRADE-NAMES,  ETC.  135 

ing  the  new  powder  nor  how  it  is  best  used,  her  results 
will  hardly  be  satisfactory.  She  prefers  old  friends  to 
new  anyway  and  joyfully  returns  to  the  familiar  brand. 
Further  she  is  a  zealous  champion  of  the  old  baking 
powder  and,  in  and  out  of  season,  is  always  ready  to 
recommend  it  and  fight  in  its  defense.  As  an  adver- 
tising agent  she  is  invaluable  and  quite  inexpensive. 

All  this  is  merely  a  manifestation  of  the  natural 
conservatism  of  human  nature, — a  following  of  the 
lines  of  least  resistance.  Once  started  in  any  particu- 
lar direction,  or  in  the  use  of  any  particular  article, 
an  individual  may  be  depended  upon  to  continue  in 
that  direction  or  the  use  of  that  particular  article  until 
some  active  influence  is  exercised  to  change  his  course. 
Furthermore  if  he  is  a  free  agent  and  has  not  yet 
adopted  an  article  that  he  must  sooner  or  later  use,  he 
will  in  nine  cases  out  of  ten  take  up  the  article  used 
or  recommended  by  those  around  him,  when  the  time 
for  adoption  comes.  This  being  recognized  as  true, 
the  enduring  value  of  an  established  trade-mark  may 
be  realized. 

Mr.  Rowell  in  "Forty  Years  an  Advertising  Agent" 
discourses  interestingly  on  this  subject.  Speaking  of 
Pond's  Extract,  he  says  that  Dr.  Humphreys  of  Home- 
opathic Specifics  fame,  who  had  theretofore  owned 
the  trade-name  mentioned,  was  glad  to  part  with  a 
business  associate  "even  at  the  expense  of  allowing 
him  to  take  away  the  most  valuable  trade-mark  the 
concern  had  possessed,  no  less  a  trade-mark  than 
'Pond's  Extract,'  a  preparation  of  Witch  Hazel  that 
is  a  household  remedy  from  one  end  of  America  to 


136  FINANCING    AN    ENTERPRISE. 

the  other.  What  a  commentary  it  is  on  the  value  of 
a  trade-mark.  The  Humphreys  people  had  made 
Pond's  Extract  for  years.  It  was  admittedly  a  prep- 
aration of  Witch  Hazel.  They  could  no  longer  sell 
it  as  Pond's  Extract,  that  privilege  had  passed  to  Mr. 
Hurtt,  but  dozens  of  other  people  were  selling  ex- 
tracts of  Witch  Hazel  and  the  Humphreys  people  had 
still  just  as  good  a  right  to  make  and  sell  an  extract 
as  anybody  else.  They  could  call  it  Humphreys'  Ex- 
tract but  not  Pond's.  Everybody  had  heretofore 
bought  Pond's  Extract  of  the  Humphreys  concern; 
now  they  could  buy  Humphreys'  Extract  there,  but 
not  Pond's.  To  get  Pond's  they  must  go  elsewhere. 
And  yet  the  Humphreys'  Extract  was  identical  in  com- 
position with  Pond's,  was  made  by  the  same  people 
that  had  always  made  Pond's  and  was  sold  in  larger 
bottles  and  at  a  lower  price ;  and  for  all  that  the  people 
would  have  none  of  it.  They  had  learned  to  use  Pond's 
and  would  have  no  other.  I  had  knowledge  in  the 
earlier  days  of  a  similar  case.  Two  men  were  part 
owners  of  a  preparation  for  the  hair  called  Hall's  Hair 
Renewer.  They  were  not  agreed  on  business  methods 
and  one  disposed  of  his  interest  in  the  concern  to  the 
other  and  that  other  became  a  millionaire  doing  busi- 
ness at  Nashua,  N.  H.  The  first  man  knew  just  as 
well  how  to  make  the  preparation,  and  did  make  it, 
and  put  it  on  the  market,  and  he  advertised  it,  too, 
only  it  was  Plummer's  Hair  Renewer  and  not  Hall's. 
Everybody  wanted  Hall's,  nobody  would  have  Plum- 
mer's, and  the  money  spent  in  advertising  it  was 
wasted.     After  a  time  the  owner  of  Hall's  Hair  Re- 


TRADE-MARKS,  TRADE-NAMES,   ETC.  1 37 

newer,  having  become  wealthy,  had  social  aspirations 
that  the  patent  medicine  business  did  not  aid,  and  the 
renewer  was  sold  for  a  great  price  to  J.  C.  Ayer  &  Co., 
of  Lowell,  who  had  already  exploited  with  some  suc- 
cess practically  the  same  thing  under  the  name  of 
Ayer's  Hair  Vigor,  but  could  not  make  it  compete  with 
Hall's  that  had  been  earlier  in  the  field." 

How  a  trade-mark  is  to  be  selected  and  established 
is  too  extended  a  discussion  to  be  undertaken  here. 
The  name  or  mark  should  usually  be  distinctive  and 
striking  as  easier  to  fix  in  the  public  mind.  Given  a 
good  trade-mark  and  a  fairly  good  article  to  support 
it,  the  rest  is  merely  skilful,  extensive  and  long  con- 
tinued advertising  and  in  connection  therewith  the 
proper  maintenance  and  supply  of  the  article  covered. 
There  should  be  no  variation  of  quality  or  failure  of 
supply.  Nothing  discourages  the  consumer  more  than 
the  inability  to  get  the  article  he  wants  at  the  time  he 
wants  it,  or  discourages  him  quicker  than  to  get  his 
favorite  article  and  then  to  find  it  vary  from  the  famil- 
iar standard, — presenting  a  different  appearance,  taste, 
odor  or  effect.    Man  wants  variety  but  not  of  that  kind. 


The  protection  of  the  trade-name  is  much  akin  to 
the  protection  of  the  trade-mark,  though  the  trade- 
name is  not  registered  or  officially  recognized  in  any 
way  by  the  National  Government.  It  is  merely  the 
name  of  an  individual,  firm  or  corporation  under  which 
a  business  is  carried  on.  The  right  of  the  owners  to 
this  name  is  a  fully  recognized  common  law  right  and 
may  be  protected,    where   necessary,   by   direct   legal 


138  FINANCING   AN   ENTERPRISE. 

proceedings.  Ordinarily  there  is  no  greater  difficulty 
in  this  than  in  the  protection  of  any  other  property 
right. 

Difficult  cases  sometimes  arise,  however,  where  a 
person  whose  name  is  similar  to  the  name,  or  leading 
name  of  some  existing  firm  or  company,  adopts  prac- 
tically the  same  title  for  a  similar  business.  Speak- 
ing generally,  a  person  cannot  be  prevented  from  using 
his  own  name  in  the  conduct  of  his  business  by  the 
fact  that  some  other  party,  to  whom  the  name  also 
belongs,  is  already  conducting  a  similar  business  under 
that  name.  While  this  is  true,  the  courts  can  usually 
be  depended  upon  to  enjoin  any  use  of  a  name  plainly 
intended  to  utilize  or  to  injure  the  reputation  of  a 
name  and  a  business  already  in  existence. 

In  a  well-known  New  York  case  (Meneely  v.  Me- 
neely,  62  N.  Y.  427),  the  doctrine  is  laid  down  broad- 
ly :  "Every  man  has  the  absolute  right  to  use  his 
own  name  in  his  own  business  even  though  he  may 
thereby  interfere  with  and  injure  the  business  of 
another  person  bearing  the  same  name,  provided  he 
does  not  resort  to  any  artifice  or  contrivance  for  the 
purpose  of  producing  the  impression  that  the  estab- 
lishments are  identical,  or  do  anything  calculated  to 
mislead.  *  *  *  /^  person  cannot  make  a  trade- 
mark of  his  own  name,  and  thus  obtain  a  monopoly 
of  it  which  will  debar  all  other  persons  of  the  same 
name  from  using  their  own  names  in  their  own 
business." 

Under  some  circumstances  the  trade-name  practi- 
cally takes  the  place  of  the  trade-mark.     This  is  true 


TRADE-MARKS^  TRADE-NAMES,   ETC.  1 39 

of  the  old,  well-established  firms,  companies  or  enter- 
prises, the  reputation  of  whose  names  has  been  built 
up  by  the  excellence  of  their  goods,  or  perhaps  through 
the  fact  of  their  being  first  in  the  particular  field  in 
which  their  business  lies. 

A  good  example  of  this,  and  one  which  also  well 
exemplifies  the  all-around  protection  that  should  be 
given  an  enterprise,  is  furnished  by  the  Remington 
typewriter.  This  typewriter  was  the  first  practical 
machine  to  be  constructed  and  was  brought  out  under 
the  name  of  one  of  its  inventors, — ''Remington."  The 
original  machine  was  naturally  very  fully  protected 
by  patents.  Many  improvements  were  made  later  and 
all  were  duly  and  fully  covered  by  patents.  A  trade- 
mark was  adopted  in  the  early  history  of  the  machine 
which,  in  the  form  of  a  red  seal,  is  to  be  found  on 
every  Remington  typewriter  and  on  everything  con- 
nected with  the  machine.  The  name  "Remington" 
was,  however,  made  the  principal  feature  and  given 
every  prominence.  Even  the  name  of  the  firm  which 
controlled  the  sale  of  the  machine  for  the  larger  part 
of  its  history  was  not  allowed  to  interfere  with  the 
all-important  trade-name  "Remington." 

This  machine  being  the  pioneer  in  its  field  found  no 
existing  demand  for  typewriters.  It  at  once  proceed- 
ed to  create  and  supply  a  demand,  which,  as  there 
were  no  competing  machines,  was  exclusively  a  de- 
mand for  Remington  typewriters.  The  machine  was 
constantly  and  vigorously  pushed,  and  so  favorable 
were  the  first  conditions  and  so  well  were  the  oppor- 
tunities improved  that  when,  by  the  expiration  of  the 


I40  FINANCING    AN    ENTERPRISE. 

principal  patents  and  the  invention  of  other  operating 
principles,  the  typewriter  field  was  partially  opened, 
the  Remington  was  too  firmly  intrenched  to  be  dis- 
placed. There  were  other  machines  and  good  ma- 
chines then  on  the  market  and  they  secured  a  portion 
of  the  trade,  but  the  Remington  held  and  still  holds 
its  place  as  one  of  the  best-known  and  most  widely 
used  American  typewriters.  It  may  be  stated  broadly 
that  there  are  no  patents  of  any  material  importance 
now  protecting  the  Remington  machine,  its  position 
being  held  solely  by  means  of  the  trade  protection 
afforded  by  its  name  and  trade-mark,  sustained  by 
good  business  management  and  by  the  continuing 
excellence  of  the  machine. 

It  may  be  noted,  however,  that  where  a  trade-name 
or  a  trade-mark  has  become  so  closely  identified  with 
a  patented  device  or  process  as  to  stand  in  the  public 
mind  for  that  device  or  the  product  of  that  process, 
the  protection  of  such  name  or  mark  is  lost  on  the 
expiration  of  the  patent.  Thus  the  exclusive  right 
to  the  name  "Singer  Sewing  Machine"  was  lost  to 
the  original  owners  as  soon  as  the  patents  on  the 
Singer  machine  expired,  the  courts  holding  that,  as 
the  term  had  come  to  designate  a  particular  kind  of 
machine,  it  had  become  public  property.  Or  had  the 
vaseline  process  been  patented,  the  owners  could  not 
have  held  the  trade-mark  "vaseline"  after  the  expira- 
tion of  their  patents,  as  both  the  product  and  the  name 
would  have  then  become  the  property  of  the  public. 


In  some  lines,  enterprises  may  be  more  or  less  pro- 
tected by  copyright.     This  protection,  where  possible, 


TRADE-MARKS,   TRADE-NAMES,   ETC.  I4I 

is  of  the  utmost  importance,  but  its  application  is  too 
limited  and  too  well  understood  by  those  interested 
to  require  extended  consideration  here.  It  differs  from 
both  patents  and  trade-mark  registration  in  its  nature, 
being  the  absolute  certification  by  the  Government  that 
the  author  or  owner,  as  the  case  may  be,  is  entitled 
to  certain  productions,  of  a  literary  or  artistic  nature, 
which  cannot  thereafter  be  used  by  others  either  in 
whole  or  in  any  material  part  without  the  consent  of 
the  author.  The  copyright  is  not  subject  to  attack — 
unless  by  direct  charge  of  wholesale  plagiarism,  or 
theft — nor,  on  the  other  hand,  does  it  protect  any- 
thing except  the  special  book,  picture,  musical  com- 
position, or  other  production  for  which  it  is  granted. 
Another  author  or  artist  may,  if  he  so  desires,  produce 
another  book,  or  picture,  entirely  similar  as  to  sub- 
ject matter,  provided  only  that  the  wording  or  the 
treatment  is  different.  Ideas  are  not  protected  by  the 
copyright — only  the  expression  of  those  ideas. 

No  attorney  is  needed  to  secure  a  copyright.  The 
process  is  simple.  Blanks  are  furnished  on  application 
by  the  Copyright  Department  of  the  Library  of  Con- 
gress with  full  instructions  as  to  the  formalities  to  be 
observed  and  as  to  the  preparation  and  filing  of  the 
application.  The  fees  are  nominal, — $i  for  each  copy- 
right and  ten  cents  for  revenue  stamp  on  the  applica- 
tion. The  copyright  so  secured  extends  over  a  period 
of  twenty-eight  years  and  may  at  its  expiration  be 
renewed  for  a  period  of  fourteen  years. 


Under  the  general   rules  of  "unfair  competition," 
a  protection  akin  to  that  afforded  by  the  trade-mark 


142  FINANCING    AN    ENTERPRISE. 

and  the  trade-name  is  extended  to  any  distinguishing 
feature  employed  in  marketing  a  particular  product, 
or  the  goods  of  some  particular  manufacture.  Thus, 
if  a  characteristic  label  has  been  long  in  use,  or  a  par- 
ticular size,  shape  or  color  of  package  has  been  em- 
ployed to  distinguish  certain  goods,  the  courts  will  not 
allow  a  competitor  to  adopt  the  same  style  of  label 
or  package  for  similar  goods  in  order  to  avail  himself 
of  the  reputation  already  attained  by  the  original 
product. 


CHAPTER  XIV. 
SECRET  PROCESSES. 


In  the  case  of  a  patentable  process,  it  is  often  a  per- 
plexing matter  to  decide  whether  it  is  better  to  patent 
it  or  to  hold  it  as  a  secret  process.  If  it  is  patented, 
the  process  must  necessarily  be  revealed  in  the  appli- 
cation for  patent  and  is  readily  accessible  to  any  inter- 
ested party.  If  not  patented,  anyone  who  discovers 
or  stumbles  upon  the  process  has  the  same  right  to  its 
use  as  has  the  inventor. 

If  the  process  is  one  easily  discoverable  by  those 
investigating  along  its  general  lines,  or  one  that  is 
perhaps  suggested  by  the  nature  or  appearance  of  the 
product,  it  would  naturally  be  patented  as  the  only 
feasible  means  for  its  protection.  If,  however,  the 
process  is  intricate,  or  outside  the  usual  lines  of  inves- 
tigation, or  of  such  a  nature  that  patent  protection 
is  difficult  of  enforcement,  it  is  usually  the  better  pol- 
icy to  operate  it  as  a  secret  process  and  to  risk  the 
chance  of  its  discovery,  or  of  its  being  revealed  by 
some  one  in  the  secret. 

The  conditions  surrounding  a  process  make  its  pro- 
tection difficult.  In  this  it  differs  from  a  mechanical 
device,  inasmuch  as  any  infringement  of  this  latter 
shows  on  its  face,  and  a  mere  inspection  of  the  device 
is  sufficient  to  disclose  the  fact,  while  in  the  case  of 
a  patented  process  there  is  usually  nothing  in  the  fin- 

143 


144  FINANCING    AN    ENTERPRISE. 

ished  product  to  show  whether  it  was  made  by  the 
patented  process  or  by  some  other  process.  Then  if 
a  competitor  manufactures  a  similar  product,  it  is 
impossible  to  tell  from  any  internal  evidence  that  it 
was  prepared  by  the  patented  process,  and  the  only 
way  by  which  an  infringement  may  be  discovered  is 
by  an  investigation  of  the  process  actually  employed. 
This,  as  the  producer  is  under  no  necessity  of  either 
giving  information  himself  or  of  admitting  the  investi- 
gator to  his  factory,  is  ordinarily  a  matter  of  very 
great   difficulty.      Frequently   it   is   impossible. 

A  recent  instance  may  illustrate  the  difficulties  of 
reaching  a  decision  in  matters  of  this  kind.  One  of 
the  smaller  chocolate  manufacturers,  after  long  ex- 
perimenting, discovered  a  very  valuable  chocolate 
preparation  produced  by  a  peculiar  treatment  and 
blending  of  his  materials.  The  preparation  was 
different  from  anything  else  of  the  kind  on  the  market, 
was  one  much  desired  by  chocolate  manufacturers  and 
for  which  many  of  them  were  then  working,  and  was 
far  superior  to  anything  as  yet  produced.  As  soon 
as  the  process  was  perfected  the  question  at  once  arose 
as  to  the  best  means  for  its  protection. 

If  patented,  its  peculiar  features  and  the  method  of 
its  preparation  would  be  published  to  the  world 
and  would  be  very  likeily  to  give  his  competitors 
hints  or  suggestions  that  might  lead  to  other 
methods  of  preparing  the  same  or  a  practically  sim- 
ilar compound.  Or  if  the  process  thus  revealed 
should  be  deliberately  stolen  and  used  by  these  other 
manufacturers,  it  would  be  extremely  difficult,  if  not 


SECRET    PROCESSES.  I45 

impossible,  to  secure  evidence  of  the  theft.  That  is, 
if  some  other  manufacturer  of  chocolate  preparations 
should  decide  the  process  to  be  a  good  thing,  should 
steal  it  bodily,  devote  some  secluded  room  of  his  fac- 
tory to  its  preparation,  put  the  whole  matter  into  the 
hands  of  a  few  trusted  employees,  and  then  come  out 
with  an  announcement  of  his  important  and  valuable 
discovery  of  a  new  chocolate  preparation,  the  detec- 
tion of  the  fraud  would  be  almost  impossible.  The 
claims  made  for  the  stolen  preparation  and  its  appear- 
ance and  qualities  might  be  identical  with  those  of 
the  legitimate  product,  and  the  owner  of  the  process 
might  be  morally  sure  that  his  process  was  being  used, 
but  how  could  he  produce  the  facts  necessary  to  sub- 
stantiate his  belief  and  give  him  a  fighting  status  in 
the  courts?  He  must  not  only  show  that  the  prepara- 
tion was  the  same  as  his  but  must  also  show  that  it 
was  produced  in  the  same  way — that  is,  by  the  process 
revealed  in  his  patents.  His  own  belief  would  have 
no  weight  as  legal  evidence.  He  could  not  compel 
the  dishonest  manufacturer  to  come  into  court  and 
make  known  the  process  actually  used.  Practically, 
then,  the  only  possible  methods  of  securing  the  abso- 
lute proof  necessary  for  the  protection  of  his  rights, 
would  be  to  introduce  spies  into  the  competitor's  fac- 
tory, who  might  discover  and  testify  to  the  process 
used,  or  to  win  over  some  one  or  more  of  his  competi- 
tor's workmen  engaged  in  the  process  and  employ 
their  testimony  to  prove  the  infringement.  Either  of 
these  plans  would  be  of  great  difficulty  and  of  doubt- 
ful propriety. 


146  FINANCING    AN    ENTERPRISE. 

On  the  other  hand,  if  the  process  were  maintained 
as  a  secret  one,  the  owner's  exckisive  interest  in  it 
would  depend  solely  upon  his  ability  to  keep  the  secret 
to  himself.  If  he  were  able  to  manufacture  the  mate- 
rial himself,  without  help,  his  exclusive  possession 
would  be  easier  to  maintain,  but  this  is  impossible  in 
most  commercial  processes,  and  in  the  particular  in- 
stance the  secret  would  of  necessity  be  intrusted  to 
his  workmen.  These  workmen,  or  one  of  them,  might 
then  be  drawn  to  his  competitors  by  higher  wages, 
or  the  secret  be  discovered  by  direct  bribery,  or  by 
spying,  or  by  other  underhand  methods.  Or  if  nothing 
of  this  kind  happened,  the  finished  product  might  give 
his  competitors  some  hint  as  to  the  direction  in  which 
to  work  and  his  process  be  discovered  by  direct  ex- 
perimental investigation.  No  matter  how,  if  the  pro- 
cess once  became  known,  its  value  as  a  monopoly 
would  be  hopelessly  lost.  The  inventor's  right  to 
a  patent  would  by  that  time  have  been  lost  and  he 
would  be  utterly  without  protection. 

In  the  particular  case  the  writer's  preference  would 
be  strongly  for  the  maintenance  of  the  operation  as  a 
secret  process.  It  would,  as  suggested,  be  liable  to 
discovery,  but  the  difficulties  of  enforcing  patent  rights 
in  a  case  of  this  kind  are  practically  insuperable,  while 
the  probabilities  of  maintaining  the  secrecy  of  the  pro- 
cess for  at  least  a  considerable  time  are  excellent. 
With  a  limited  number  of  trusted  workmen,  given 
perhaps  some  interest  in  the  product,  and  with  all  pos- 
sible safeguards  thrown  round  the  process,  its  secrecy 
might  be  maintained  indefinitely — perhaps  for  a  far 


SECRET    PROCESSES.  1 47 

longer  period  than  the  Hfe  of  a  patent — whereas  the 
process  if  patented  would  certainly  become  public 
property  at  the  end  of  the  patent  period  and  could 
not  be  efficiently  protected  at  any  time.  In  effect  it 
would  become  the  property  of  any  unscrupulous  manu- 
facturer from  the  day  the  patent  was  issued. 

Also  by  maintaining  the  process  as  a  secret  one, 
it  could,  under  any  ordinary  circumstances,  certainly 
be  presented  to  the  owner  for  a  sufficient  length  of 
time  to  enable  him  to  throw  around  it  the  additional 
protection  of  his  trade-name  and  a  trade-mark,  as 
already  discussed.  In  this  event  the  actual  process  of 
preparation  would  become  a  matter  of  much  less  vital 
importance,  and,  in  fact,  might  finally  sink  to  the  posi- 
tion of  a  mere  incidental  feature  of  protection.  As 
already  stated,  the  processes  of  manufacture  of  num- 
erous and  very  valuable  trade-marked  preparations 
are  well  and  generally  known  but  their  value  to  their 
owners  is  not  materially  affected  by  these  conditions. 

In  conclusion  it  may  be  said  that  in  any  case  in 
which  the  process  to  be  guarded  is  one  that  can  be 
kept  in  the  hands  of  one  man,  or  of  a  few  men,  and 
is  of  such  a  nature  that  it  is  not  likely  to  be  discovered, 
or  will  not  be  revealed  by  the  product  itself,  it  is  best 
held  as  a  secret  process. 

A  secret  method  of  tempering  watch  springs  might 
serve  as  an  illustration  of  this  kind  of  process.  Here 
one  man,  if  the  process  were  simple,  might  himself 
temper  enough  springs  to  supply  the  world,  and  the 
process  should  undoubtedly  be  kept  a  secret.  To  pat- 
ent it  would  in  effect  make  it  public  property,  as  the 


148  FINANCING    AN    ENTERPRISE. 

prevention  of  infringement  would  from  the  nature  of 
the  case  be  impossible. 

When,  however,  a  process  requires  the  employment 
of  many  men,  who  either  necessarily  know,  or  are  in 
a  position  to  learn  its  secret,  or  when  it  is  of  a  nature 
that  necessitates  its  public  exposure  to  a  greater  or 
less  degree,  it  is  better  patented.  Under  such  cir- 
cumstances, its  protection  for  any  length  of  time  as 
a  secret  process  is  practically  impossible,  and  on  the 
other  hand  it  could  hardly  be  adopted  and  used  by  a 
rival  manufacturer  without  detection. 

Some  of  the  modern  methods  of  producing  and 
treating  iron  and  steel,  are  examples  of  this  kind  of 
process.  Here  the  operations  must  be  conducted  on 
such  a  scale  and  under  such  conditions  that  the  secret 
could  not  be  preserved  and,  on  the  other  hand,  their 
surreptitious  employment  is  practically  impossible. 
In  any  such  case  the  owner  may  patent  his  process 
with  entire  assurance  that  if  it  should  be  used  without 
his  consent,  the  discovery  of  the  fact  and  the  proof  of 
such  use  are  matters  presenting  but  little,  if  any, 
difficulty. 

Between  the  process  which  should  manifestly  be 
kept  secret  and  the  process  that  is  as  obviously  best 
protected  by  patent,  come  a  multitude  of  processes  for 
which  the  best  method  of  protection  can  only  be  de- 
cided by  a  consideration  of  the  particular  conditions. 
In  some  few  complicated  processes  the  protection  of 
patents  may  be  secured  for  parts  of  the  process  while 
other  parts  are  kept  secret,  but  usually  one  or  the  other 
method  of  protection  is  alone  to  be  had. 


CHAPTER  XV. 
MONOPOLIES. 


Freedom  from  competition,  or  in  other  words,  an 
exclusive  control  or  monopoly,  is  the  desideratum  of 
the  business  world.  In  all  the  methods  of  protection 
discussed  in  the  preceding  chapters,  the  end  sought  is 
relief  from  competition  and  the  establishment,  as 
far  as  possible,  of  exclusive  rights,  and  the  more 
fully  this  is  done  and  the  nearer  a  monopoly  is  approx- 
imated, the  smoother  the  commercial  pathway  of  the 
fortunate  individual,  and,  governed  by  the  possibili- 
ties of  the  particular  line  of  business,  the  greater  his 
rewards.  The  proper  protection  of  a  business  then 
becomes  of  vital  importance  and  a  general  discussion 
of  the  subject  and  of  the  methods  by  which  monop- 
olies are  established  and  maintained  will  not  be  out 
of  place. 

As  will  be  noted  in  some  of  the  examples  already 
given,  it  is  at  times  possible  to  utilize  efficiently  several 
of  the  usual  methods  of  protection  for  a  single  product 
or  enterprise.  For  instance,  the  chocolate  preparation 
discussed  under  secret  processes,  might  be  primarily 
protected  by  patent,  or  if  not  patented,  be  held  as  a 
secret  process.  Or  the  process  might  be  partially  pat- 
ented and  partially  held  as  a  secret  process  if  capable 
of  such  division  as  to  permit  of  this  double  protection. 
Next,  if  not  patented,  the  preparation  could  be  sold 

149 


150  FINANCING   AN    ENTERPRISE. 

under  the  protection  of  a  trade-mark,  and  finally,  its 
sale  would  naturally  be  conducted  under  the  trade- 
name of  the  concern.  The  preparation  so  protected 
would  have  but  little  to  fear  from  outside  interference 
or  competition  so  long  as  it  was  handled  with  reason- 
able business  ability. 

Where  the  enterprise  will  not  permit  of  the  methods 
of  protection  discussed,  other  means  must  be  found  or 
devised  that  will  preserve  the  enterprise  from  the 
effects  of  destructive  competition  and  enable  it  to  at 
least  maintain  its  own. 

In  the  standard  lines  of  business  there  is,  as  a  gen- 
eral rule,  but  restricted  scope  for  the  protective  meas- 
ures already  considered.  The  ground  is  too  open  and 
too  well  known  to  permit  of  anything  approaching 
monopoly,  save  such  as  may  be  secured  by  a  careful 
observance  of  the  laws  of  supply  and  demand,  by  judg- 
ment in  the  selection  of  a  location,  discretion  as  to 
the  character,  quality  and  quantity  of  stock,  honest 
and  courteous  treatment  of  customers  and  of  em- 
ployees, and  general  business  intelligence  and  ability. 
Various  subsidiary  or  incidental  lines  or  articles  may 
perhaps  be  protected  by  patents  or  trade-marks,  or  be 
held  as  secret  processes,  and  the  trade-name  itself  is 
occasionally  the  equivalent  of  a  monopoly,  and  is  at 
all  times,  if  properly  worked  up,  a  protective  and 
retaining  feature  of  great  value.  Beyond  this  the 
field  is  open,  and,  barring  inequalities  as  to  capital  and 
natural  abilities,  the  fight  is  a  fair  one  with  no  favors. 

In  such  cases,  not  permitting  of  patent,  trade-mark 
or  other  special  protection,  or  only  partially  so,  and 


MONOPOLIES.  151 

not  possessing  any  of  the  usual  features  of  a  monopoly, 
the  same  ends,  as  nearly  as  may  be,  are  attempted  by 
very  diverse  methods. 

Thus  one  man  will  advertise  so  extensively  and  so 
persistently  that  his  competitors  of  quieter  tastes,  or 
less  aggressive  dispositions,  are  lost  in  the  turmoil. 
They  are  still  there  but  so  completely  overshadowed 
that  the  blatant  advertiser  has  most  of  the  advantages 
of  exclusive  control. 

Or  again  some  one  will  gain  possession  of  improved 
machinery,  or  better  facilities,  or  secure  the  same  ends 
by  better  management  or  superior  ability,  and  rout 
competitors  by  either  supplying  more  or  better  goods 
for  the  same  money,  or  the  same  goods  for  less  money, 
or  doing  something  else  equally  destructive  of  their 
business  and  peace  of  mind. 

Or  another  commercial  genius  will  discover  an  in- 
dustrial line  of  quite  low  resistance,  something  which 
has  been  neglected  or  overlooked,  or  which  has  been 
opened  up  by  changing  conditions,  in  which  he  has 
a  vantage  ground  over  others.  Instead  of  blazoning 
forth  his  discovery  to  the  world  and  to  his  competi- 
tors in  particular,  he  carries  on  a  still  hunt, — the  quiet- 
est campaign  possible,  reaching  his  market  or  con- 
sumers in  the  most  unobtrusive  way  he  can  devise  and 
prospering  perhaps  for  years  \\'Jithout  competition, 
because  those  who  would  otherwise  be  his  competitors 
have  no  idea  that  he  has  any  business  worth  competing 
for,  or  which  they  could  follow  with  profit  to  them- 
selves. 

The  writer  has  in  mind   an  instance  of  this  kind 


152  FINANCING    AN    ENTERPRISE. 

which  was  brought  to  a  very  unfortunate  conclusion 
by  the  unintentional  interference  of  a  paternal  gov- 
ernment. Just  before  the  Civil  War  a  new  firm  had 
been  formed  in  a  flourishing  town  of  one  of  the  Cen- 
tral States  to  carry  on  a  general  toy  and  notion  busi- 
ness. It  was  the  only  establishment  of  the  kind  in  the 
place  and  for  a  time  did  a  very  ordinarily  profitable 
business,  paying  rent  and  a  living  profit  but  nothing 
more.  With  the  advent  of  the  war,  however,  a  change 
came  over  the  scene.  A  period  of  inflation  began, 
money  was  plentiful,  it  had  to  be  spent  and  the  young 
firm  found  itself  in  a  singularly  favorable  position  to 
facilitate  this  operation.  The  partners  were  alive  to 
the  emergency,  added  to  and  extended  their  stock 
materially,  and  were  shortly  doing  an  astonishingly 
profitable  business.  They  did  not  deem  it  necessary  to 
proclaim  this  fact,  however,  but  merely  advertised 
their  business  in  the  usual  way  and  jogged  along  as 
quietly  as  if  they  were  not  running  one  of  the  most 
remunerative  little  monopolies  in  the  place. 

This  went  on  to  the  satisfaction  of  all  parties — and 
especially  of  the  partners — until  the  Government  in 
its  wisdom  saw  fit  to  impose  an  income  tax  upon  the 
population  of  the  loyal  states,  and  as  a  means  thereto 
required  everyone  to  submit  a  sworn  statement  as  to 
his  or  her  income.  Unfortunately  the  members  of  the 
young  firm  were  respectively  possessed  of  that,  at 
times,  exceedingly  embarrassing  and  uncomfortable 
business  appendage, — a  conscience.  Accordingly  they 
returned  an  honest  report  of  their  income,  which,  in 
connection    with    many   other    reports,    some    correct 


MONOPOLIES.  153 

but  most  of  them  enormously  discounted,  was  forth- 
with pubHshed  in  the  daily  papers.  It  was  a  revela- 
tion to  the  burghers  of  the  town.  They  arose  as  one 
man,  including  many  women,  and  before  the  next 
Christmas  every  corner  grocery,  every  dry  goods 
store,  and  practically  every  other  establishment  in 
town  had  added  an  annex  for  the  sale  of  toys  and 
notions.  As  a  result,  what  had  been  before  a  most 
prosperous  and  profitable  enterprise  was  reduced  within 
a  season  to  the  verge  of  disaster,  and,  as  a  matter  of 
fact,  the  nature  of  its  business  was  shortly  changed. 

A  monopoly  may  be  established  either  by  exclusive 
control  of  a  product,  or  by  control, — usually  by  vir- 
tue of  location, — of  the  market  for  a  product. 

A  very  good  example  of  the  establishment  of  a  mo- 
nopoly by  securing  practical  control  of  the  entire  out- 
put, is  found  in  the  history  of  the  Kimberly  diamond 
fields.  The  great  bulk  of  the  diamond  supply  of  the 
world  comes  from  these  fields.  Formerly  the  mines 
of  the  district  were  in  the  hands  of  a  great  number  of 
small  owners  operating  independently  and  as  each  man 
saw  best,  without  regard  to  the  laws  of  supply  and 
demand  or  any  other  economic  principles.  Their  only 
anxiety  was  to  secure  and  realize  upon  the  largest  pos- 
sible output  in  the  shortest  possible  time. 

This  was  a  very  natural  proceeding,  but  it  entirely 
overlooked  the  great  natural  possibilities  of  monopoly 
in  the  Kimberly  fields.  Instead  of  the  peace  of  mind, 
great  profits  and  other  comfortable  features  of  a  mo- 
nopoly, there  was  the  most  active  competition,  over- 
production,  and  resulting  stress  and  distress,  until  a 


154  FINANCING   AN    ENTERPRISE. 

glut  in  the  diamond  market  ensued,  prices  fell  disas- 
trously, and  the  whole  business  was  in  a  state  of  de- 
moralization. The  enormously  important  fact  that 
practically  the  world's  supply  of  diamonds  was  coming 
from  these  few  acres  of  blue  clay  was  absolutely 
ignored. 

At  this  stage  of  the  proceedings,  Cecil  Rhodes  and 
his  associates,  who,  whatever  their  shortcomings  in 
other  directions,  were  unquestionably  men  of  great 
business  ability,  saw  the  industrial  bearings  and  possi- 
bilities of  the  conditions.  Without  hesitation  they 
stepped  in,  purchasing,  absorbing,  compelling  as  best 
they  might,  until  all  the  rival  ownerships  were  con- 
solidated. They  then  systematized  the  business, 
abolished  all  independent  and  competitive  operation, 
put  the  mines  under  one  capable  management,  regu- 
lated production  and  thereby  prices,  and  from  a  con- 
fusion of  warring  elements  evolved  a  complete  and 
smoothly  operating  industrial  machine. 

As  soon  as  this  industrial  reorganization  was  com- 
pleted the  Kimberly  mines  controlled  and  still  con- 
trol the  diamond  markets  of  the  world.  By  increas- 
ing the  output,  or  by  allowing  a  larger  portion  of  the 
output  to  go  on  the  market,  its  managers  can  at  any 
time  lower  the  price  of  diamonds  in  every  civilized 
country  of  the  globe.  By  restricting  the  output,  they 
can  raise  the  price  of  the  gem  wherever  it  is  bought 
or  sold.  The  market  is  in  their  hands,  and  the  whole 
problem  narrows  down  to  the  one  point  of  the  proper 
production  to  secure  the  best  results — the  greatest 
profit  for  the  owners  of  the  mines. 


MONOPOLIES.  155 

It  is  manifest  that  if  the  output  were  increased  too 
greatly,  the  i^rice  would  decrease  in  proportion  or 
even  in  greater  ratio,  the  profits  of  the  owners  becom- 
ing even  less  than  on  a  smaller  production.  Also  the 
volume  of  business  and,  as  a  consequence,  the  operat- 
ing expenses  would  be  greater  and  the  source  of  sup- 
ply— which  is  not  supposed  to  be  inexhaustible — would 
be  rapidly  depleted.  If,  on  the  other  hand,  the  output 
be  restricted  too  far,  the  price  would  immediately  rise, 
but  the  demand  would  as  immediately  fall,  and  the 
profits  of  the  owners  be  curtailed  by  the  decreased 
demand.  Also  if  the  price  were  raised  unduly,  the 
activity  of  the  other  diamond-producing  regions  of 
the  world  would  be  promptly  and  greatly  stimulated, 
or  perhaps  new  fields  might  be  discovered,  all  result- 
ing in  increased  competition  and  a  loss  of  profit  to  the 
Kimberly. 

Another  example  of  a  monopoly  from  the  nature — 
or  conditions — of  the  product,  was,  for  a  number  of 
years,  afforded  by  the  great  pitch  lake  of  Trinidad. 
This  enterprise  is  an  interesting  one,  not  only  because 
of  the  original  features  of  monopoly  which  brought 
it  into  prominence,  but  also  because  of  the  aggressive 
ingenuity  with  which  this  natural  monopoly  was  per- 
petuated and  protected  long  after  it  would,  in  the  ordi- 
nary course  of  events,  have  fallen  into  a  condition  of 
innocuous  desuetude,  or  at  least  into  the  position  of 
very  secondary  importance  where  it  properly  belongs. 

As  a  matter  of  fact,  the  material  known  as  Trinidad 
asphalt  is  not  peculiarly  favorable  for  paving  purposes. 
It  is,  as  taken  from  the  lake,  but  from  50%  to  60% 


156 


FINANCING    AN    ENTERPRISE. 


asphalt,  the  balance  of  the  constituent  materials  being 
designated  by  those  opposed  to  the  Trinidad  asphalt  as 
''trash,"  These  other  materials  are  really  the  debris 
that  has  fallen  into  the  lake  or  become  incorporated 
into  the  asphalt  while  in  the  lake  basin.  A  very  large 
proportion  of  this  foreign  material  is  organic  matter, 
actively  detrimental  to  the  quality  and  general  use  of 
the  asphalt.  The  material  as  taken  from  the  lake 
must,  therefore,  be  refined  before  being  used  for  pav- 
ing purposes,  but  it  is  impossible  to  entirely  remove 
the  organic  matter.  Also  the  asphalt  as  refined  does 
not  possess  enough  natural  asphaltic  oil  to  make  it  a 
suitable  paving  material,  and,  therefore,  before  use 
a  certain  amount  of  petroleum  residuum  is  added  to 
give  it  the  necessary  life  and  "staying"  quality. 

As  will  be  seen  there  were  serious  difficulties  in  the 
way  of  using  the  Trinidad  asphalt  for  paving  purposes 
and  the  original  promoters  of  the  enterprise,  Mr.  Alon- 
zo  Barber  and  his  very  efficient  ally  and  chemical  ex- 
pert, Prof,  de  Schmedt,  deserve  much  credit  for  the 
persistence  and  intelligence  of  their  original  study  of 
the  material  and  for  the  very  excellent  paving  material 
they  finally  succeeded  in  producing  from  it. 

As  soon  as  these  gentlemen  had  solved  the  problem 
of  the  reasonably  successful  use  of  the  Trinidad  as- 
phalt for  paving  purposes,  the  Barber  Asphalt  Com- 
pany was  formed,  and  proceeded  with  intelligence  and 
deliberation  to  build  up  and  fortify  one  of  the  strong- 
est monopolies  of  its  day. 

There  were  in  use  at  that  time  other  asphalts  much 


MONOPOLIES.  157 

better  for  paving  than  the  Trinidad,  but  these  others 
were  European  asphalts,  were  somewhat  costly  for  use 
on  this  side  of  the  world,  and,  for  various  reasons,  did 
not  produce  a  favorable  impression  when  first  laid  in 
this  country.  They  were  not  serious  competitors  and 
the  Barber  Asphalt  Company  gained  the  first  hold. 
Also  in  spite  of  the  fact  that  the  Trinidad  asphalt 
lake  was  and  is  crown  property,  belonging  to  England 
and  merely  held  under  lease  and  royalty,  the  Barber 
people  managed  with  much  astuteness  to  produce  the 
impression  that  the  Company  was — and  with  some 
justice,  for  the  asphalt  was  never  successfully  used  in 
any  foreign  country — an  American  enterprise,  and 
that  for  this  reason  its  product  should  be  given  pref- 
erence over  any  other  asphalt. 

Also  the  American  public  was  carefully  and  system- 
atically educated  as  to  the  merits  of  the  pavement,  and 
the  name  of  the  Barber  Asphalt  Paving  Co.,  and  the 
material  "Trinidad"  asphalt  were  so  closely  associated 
with  the  whole  industry  that  the  mere  mention  of 
asphalt  paving  at  once  suggested  both  the  names  of 
the  Company  and  its  asphalt. 

It  may  be  mentioned  that  at  this  time  other  and  su- 
perior asphalts,  such  as  the  Bermudez,  the  California 
asphalts,  the  sand  and  limestone  asphalts  of  the  in- 
terior states,  etc.,  had  been  found  and  were  being 
produced  to  a  limited  extent.  This,  however,  only 
spurred  the  Barber  people  to  higher  flights  of  imagin- 
ation and  they  actually  discovered  that  the  defects  of 
their  material  were  excellencies  that  could  neither  be 
found  nor  reproduced  in  any  other  asphalt. 


158  FINANCING   AN    ENTERPRISE. 

Acting  on  this  discovery  they  declared  that  the  im- 
purities of  Trinidad  asphalt  were  natural  additions 
essential  to  its  excellence  and  not  to  be  replaced  in 
other  asphalts  by  artificial  additions ;  further  that  the 
heavy  oil  added  to  the  Trinidad  was  superior  to  the 
natural  oils  of  the  other  asphalts  and  in  short,  to  sum 
up  the  whole  matter,  that  Providence,  perceiving  some- 
what tardily  the  necessity  and  importance  of  asphalt 
pavements,  and  noticing  that  no  provision  had  been 
made  therefor  in  the  original  creative  process,  had 
prepared  the  Trinidad  Lake  asphalt  for  the  express 
purpose,  and  that  any  doubts  cast  upon  the  excellence 
of  the  material  bordered  closely  on  the  impious. 

This  w^as  ingenious  but  the  Trinidad  people  did  not 
place  their  trust  entirely  in  Providence.  By  unremit- 
ting and  well  rewarded  missionary  work  among  the 
local  politicians  of  all  places  where  asphalt  paving  was 
being  laid,  or  likely  to  be  laid,  they  succeeded  in  con- 
vincing these  local  politicians  of  the  marvellous  quali- 
ties of  Trinidad  asphalt  and  in  committing  them  to  the 
furtherance  of  the  designs  of  Providence  in  the  matter 
of  its  use.  So  well  done  was  their  work  that  almost 
every  municipality  of  the  country  which  advertised 
for  asphalt  paving  either  inserted  a  provision  calling 
for  Trinidad  asphalt,  or  for  an  asphalt  of  similar  com- 
position, which  could  not.,  of  course,  be  procured  out- 
side of  Trinidad  Lake.  As  a  result  of  all  this  well- 
directed  effort  the  asphalt  held  its  own  in  the  face  of 
the  most  strenuous  opposition  for  a  long  term  of  years 
and  even  now  the  specifications  of  many  of  our  cities 
practically  call  for  Trinidad  asphalt. 


MONOPOLIES,  159 

The  whole  enterprise  is  interesting  as  showing  the 
strength  of  a  monopoly  once  established  and  the  dis- 
tance to  which  it  can  be  carried  in  the  face  of  con- 
ditions distinctly  unfavorable. 

In  the  case  of  the  Standard  Oil  Company  we  find  a 
monopoly  where  nature  did  not  intend  one,  and  it  is 
undoubtedly  the  most  remarkable  case  of  the  kind  in 
industrial  annals.  Here  the  process  that  obtained  in 
the  case  of  the  Trinidad  Lake  asphalt  was  reversed, 
and  the  enterprise  instead  of  beginning  as  a  natural 
monopoly  and  then  being  maintained  as  an  artificial 
one,  was  first  inaugurated  and  maintained  as  an  arti- 
ficial or  forced  monopoly,  until  it  had  attained  such 
size  and  strength  that  it  was  enabled  to  change  its 
character  to  that  of  a  natural  monopoly. 

Oil  is  found  in  every  part  of  the  country  and  in 
every  part  of  the  world.  Its  distribution  is  so  wide 
and  the  quantities  found  are  so  excessive  that  at  first 
sight  there  would  not  appear  to  be  any  possible  open- 
ing for  a  monopoly — not  nearly  so  good  as  in  coal  or 
salt,  or  copper  or  iron,  or  a  dozen  other  of  the  exten- 
sively used  and  widely  distributed  necessaries  of  life. 

It  is  not  at  all  probable  that  Mr.  Rockefeller  had 
any  idea  in  his  early  connection  with  the  oil  business 
of  establishing  the  very  complete  and  all  absorbing 
monopoly  that  he  did,  nor  of  the  enormous  magnitude 
of  the  work  he  had  undertaken.  Nor  is  it  at  all  prob- 
able that  any  such  combination  or  absorption,  as  he 
effected  could  have  been  brought  a])()ut  bv  fair  and 
honest  means.  It  did  not  matter  at  all  to  Rockefeller, 
however.     He  saw  the  goal  immediately  before  him. 


l6o  FINANCING    AN    ENTERPRISE. 

He  also  had  a  conviction  that  his  career  had  been 
arranged  by  Providence — a  pleasing  conviction  that 
seems  to  prevail  among  monopolists — and  that  noth- 
ing could  be  allowed  to  stand  between  him  and  the 
success  for  which  he  was  destined.  At  any  rate  he, 
or  his  associates,  did  not  allow  anything  to  stand  in 
the  way  and  by  a  system  of  the  most  deliberate  and 
cold-blooded  industrial  brigandage,  admirable  for  its 
detailed,  intricate  and  comprehensive  character,  and 
for  the  intelligence  and  insistence  with  which  it  was 
carried  out,  but  damnable  from  the  standpoint  of  mor- 
ality and  the  fellowship  of  man,  built  up  one  of  the 
greatest,  the  most  profitable,  and  the  most  powerful 
monoplies  the  world  has  ever  seen. 

The  first  organization  was  characterized  by  a  strong 
centralization  of  power,  by  the  ability  of  the  men  con- 
nected with  it,  and  by  the  unscrupulous  character  of 
its  operations.  Its  first  strong  hold  on  the  situation 
was  secured  through  special  freight  rates  and  then  by 
the  iniquitous  rebate  system  whereby  its  rivals  were 
forced  unwittingly  to  contribute  to  its  power  and  to 
their  own  ultimate  destruction.  Under  this  system  the 
organization  not  only  reaped  the  profits  of  its  own 
business,  but  without  right  or  reason — except  the 
power  to  do  so — levied  toll  on  the  business  of  every 
man  who  ventured  to  enter  the  field  as  an  independent. 
Oil  could  not  be  sold  without  being  shipped,  and  on 
every  barrel  of  oil  shipped  by  its  competitors  the  Stan- 
dard Oil  Company  received  a  substantial  payment. 

The  details  of  the  rise  of  Standard  Oil  are  too 
well  known  to  require  recounting.     Suffice  it  to  say 


MONOPOLIES.  l6l 

that  by  rebates  and  discriminating  rates,  by  controll- 
ing the  refineries,  by  controlling  the  means  of  storing 
and  piping  oil,  by  controlling  everything  connected 
with  oil,  by  buying,  crushing,  absorbing  and  destroy- 
ing competition  of  every  kind,  the  artificial  monoply 
at  first  created  was  transformed  into  a  natural  monop- 
oly practically  controlling  the  entire  oil  output  of  the 
country — so  much  so  that  the  Standard  Oil  regulated 
the  price  of  oil  subject  only  to  its  own  discretion, 
modified  to  some  extent  by  the  great  natural  laws  of 
supply  and  demand — laws  which  even  the  Standard 
Oil  Company  was  not  able  to  entirely  overthrow, 
though  it  juggled  with  them  greatly  to  its  profit. 

Such  a  monopoly  as  the  Standard  Oil  Company 
enjoys  might  be  called  a  forced  monopoly.  There  are, 
however,  numberless  instances  of  natural  and  entirely 
legitimate  monopolies,  as  where  a  coal  mine  is  open- 
ed in  such  a  location  as  to  secure  better  rates  to  its 
particular  market  than  any  competing  mines,  or  where 
a  clay  bank  is  discovered  that  will  make  a  brick  supe- 
rior to  anything  else  in  that  vicinity,  or  where  a  par- 
ticular soil  is  found  that  will  grow  a  certain  kind  of 
vegetable  or  fruit  in  greater  perfection  than  elsewhere, 
or  where  other  superiority  is  given  by  natural  and 
honestly  existing  conditions. 

Other  perfectly  legitimate  monopolies  of  a  local 
character  are  more  or  less  artificial,  or  are  built  up, 
as  where  a  brickmaker  discovers  that  a  few  brick 
plants  in  his  neighborhood  occupy  all  the  available  clay 
beds  and  by  a  combination  of  these  secures  a  practical 
monopoly  of  the  brick  business  in  that  neighborhood; 


1 62  FINANCING    AN    ENTERPRISE. 

or  where  a  coal  operator,  securing  the  exclusive  right 
for  his  territory  of  a  new  and  very  economical  appar- 
atus for  channeling  coal,  drives  his  competitors  out 
of  business  by  cheaper  production. 

In  most  cases,  however,  the  advantages  enjoyed  by 
any  particular  enterprise  are  not  sufficient  to  consti- 
tute a  monopoly,  but  only  sufficient  to  render  the 
undertaking  more  profitable  to  its  owners  than  are 
other  similar  but  less  favored  competitors,  as,  for 
instance,  where  a  coal  mine  is  located  more  favorably, 
whereby  its  cost  of  mining  is  a  cent  or  two  less  per  ton 
than  its  competitors,  giving  it  a  better  profit  than  these 
others  but  not  such  an  advantage  as  to  enable  it  to 
drive  them  out  of  business ;  or  where  a  pottery  is 
located  so  that  it  can  secure  a  trifling  advantage  in 
freight  rates  over  its  competitors,  enhancing  its  profits 
as  compared  with  those  others  but  not  sufficient  to 
constitute  a  monopoly  or  permit  its  upbuilding. 

In  conclusion  it  may  be  said  that  in  every  case  of 
successful  business,  advantages  of  some  kind  must  of 
necessity  exist  to  give  it  such  equality  with  or  superi- 
ority over  its  competitors  as  will  enable  it  to  exist,  and 
that  in  every  business  its  success  will  be  accurately 
measured  by  the  ability  with  which  every  possibility 
of  advantage  is  discovered  and  developed.  All  cannot 
have  monopolies  but  the  best  business  success  requires 
as  near  approximation  thereto  as  conditions  will  per- 
mit. 


PART  IV.  CAPITALIZATION  OF  AN 
ENTERPRISE. 


CHAPTER  XVI. 

CAPITALIZATION. 

Legal  Status.     Functions. 


In  Dr.  Meade's  "Trust  Finance"  the  capitalization 
of  a  corporation  is  defined  as  "the  face  or  par  value 
of  the  stock  and  bonds  which  the  corporation  has 
issued,"  and  this  is  usually  the  meaning-  of  the  term 
when  employed  in  the  discussions  of  "higher  finance." 
For  the  purposes  of  the  present  volume  the  term  is 
employed  in  its  more  popular  sense,  i.  e.,  the  capital 
stock  of  the  corporation  or  the  amount  of  stock 
which  it  is  authorized  to  issue.  This  includes  com- 
mon and  preferred  stock,  whether  issued  or  unissued, 
but  does  not  include  bonds  or  any  other  corporate 
obligations. 

Capitalization  is  a  necessary  feature  of  incorpora- 
tion. In  every  state  of  the  Union  the  laws  providing 
for  incorporation,  either  directly  or  by  implication, 
require  the  corporation  to  have  a  specified  capital 
stock.  The  amount  of  this  capitalization  or  capital 
stock  is  in  most  states  of  the  Union  fixed  by  the  char- 

163 


164  FINANCING    AN    ENTERPRISE. 

ter  of  the  corporation.  Primarily,  however,  it  is  deter- 
mined by  the  parties  who  have  the  incorporation  in 
charge,  before  application  is  made  for  a  charter.  It 
therefore  represents  the  amount  of  capital  which  the 
incorporators  deem  necessary  for  the  successful  opera- 
tions of  the  enterprise  under  the  corporate  form  or 
the  amount  of  stock  upon  which — in  their  judgment — 
it  can  pay  dividends.  That  is,  if  they  capitalize  at 
$25,000,  presumably  they  either  consider  this  amount 
of  stock  requisite  for  the  purposes  of  the  undertaking, 
or  believe  that  dividends  can  be  paid  upon  that 
amount. 

In  fixing  the  capitalization  of  an  enterprise  the 
incorporators  have  wide  discretion.  They  will,  how- 
ever, naturally  be  governed  by  the  conditions  sur- 
rounding the  enterprise  and  usually  some  limitations 
are  imposed  by  the  law. 

Laws  expressly  affecting  the  amount  of  capitaliza- 
tion are  few.  Practically  the  only  ones  of  impor- 
tance are  those  fixing  a  minimum  capitalization,  as 
in  New  Jersey,  where  the  capital  stock  must  be  at 
least  $2,000,  or  in  New  York,  where  it  must  be  at 
least  $500.  Such  laws  exist  in  most  states  of  the 
Union.  A  maximum  limit  is  found  also  in  a  few 
states,  but  the  number  of  these  states  is  so  small  and 
the  limit  is  so  liberal  as  to  make  the  whole  matter 
immaterial. 

Indirect  provisions  are,  however,  more  numerous. 
In  many  states  a  certain  proportion  of  the  capital 
stock  must  be  paid  in — that  is,  it  must  have  been 
issued  for  value  received  by  or  for  the  corporation — 


CAPITALIZATION.  1 65 

prior  to  incorporation,  or  before  the  corporation  com- 
mences business,  or  within  a  certain  time  thereafter. 
Thus  in  Maryland  one-fourth  the  capital  stock  must 
be  paid  in  within  one  year  of  incorporation,  and  in 
New  York  one-half  must  be  paid  in  within  the  same 
time.  The  severity  of  these  requirements  is  somewhat 
mitigated  by  the  fact  that  payment  may  be  made  in 
property  or  services,  but  they  naturally  tend  to  place 
some  limitation  upon  capitalization.  In  the  District 
of  Columbia  the  provisions  are  much  more  severe. 
Here  not  only  must  the  entire  capital  stock  be  sub- 
scribed for  in  good  faith,  but  ten  per  cent,  of  these 
subscriptions  must  be  paid  in  cash  in  good  faith  before 
the  charter  may  even  be  filed.  These  laws  are  recent 
and  it  is  obvious  that  under  their  exceptionally  rig- 
orous requirements  the  amount  of  capitalization  of 
any  particular  corporation  will  of  necessity  be  limited 
to  a  very  conservative  figure;  also  that  the  airily  un- 
substantial corporations  rather  characteristic  of  the 
District  of  Columbia  under  its  former  lax  laws  are 
now  absolutely  impossible. 

Agaiin,  in  most  states  before  a  corporation  may  be 
organized,  a  fee  or  tax  usually  proportioned  to  the 
amount  of  capitalization  must  be  paid  the  state  offi- 
cials, and  thereafter  annual  franchise  taxes  are  levied. 
For  instance,  in  New  Jersey  an  incorporating  fee  must 
be  paid  of  twenty  cents  for  each  thousand  dollars  of 
capitalization — minimum  fee  $25 — and  thereafter  an 
annual  franchise  tax  is  levied,  amounting  on  capitali- 
zations of  less  than  $3,000,000  to  $1  for  each  $1,000 
of  stock  outstanding.     Taxes  of  this  kind  mount  up 


l66  FINANCING    AN    ENTERPRISE. 

rapidly  and  in  practice  have  a  very  material  effect  in 
limiting  the  amount  of  capitalization. 

Also  in  most  states  laws  exist  requiring  full  pay- 
ment of  all  issued  stock.  That  is,  every  dollar  of  out- 
standing stock  is  supposed  to  represent  a  dollar  of 
value  actually  received  by  the  corporation.  In  some 
few  states  these  laws  are  strictly  enforced  and  are 
then  an  effective  limitation  on  excessive  capitali- 
zations. 

While  these  laws  exist  and  must  be  borne  in  mind 
when  capitalization  is  under  consideration,  they  are 
in  most  states  reasonable  and  even  liberal.  Even  the 
direct  laws  mentioned,  expressly  prescribing  the  min- 
imum and  maximum  capitalizations,  impose  no  prac- 
tical limitation,  while  the  laws  requiring  full  payment 
of  capital  stock  are  in  most  states  so  indefinite  as  to 
wording  or  so  slackly  enforced  as  to  be  of  but  little 
effect.  Further,  excessive  incorporation  fees  and  fran- 
chise taxes  and  any  other  requirements  as  to  capital- 
ization, found  too  rigorous  in  one  state,  are  always 
to  be  avoided  by  incorporation  in  some  more  liberal 
state.  In  practice,  then,  it  may  be  said  broadly  that 
the  laws  affecting  capitalization  impose  material  re- 
strictions upon  its  amount  in  but  few  cases,  and  that 
while  these  laws  must  be  considered,  they  will  not  as 
a  rule  be  found  either  an  insuperable  bar  or  even  a 
serious  obstacle  to  any  capitalization  that  may  be 
reasonably  desired. 

Capitalization  has  two  entirely  distinct  and  very 
important  functions — (i)  as  a  convenient  means  of 
apportioning  the   interests  in   an  incorporated  enter- 


CAPITALIZATION.  1 67 

prise;  (2)  as  a  measure  of  the  value  of  an  enterprise. 
These  functions  are  independent  of  each  other,  though 
both  may  be,  and  frequently  are,  exercised  at  the  same 
time.  Speaking  generally,  it  may  be  said  that  capi- 
talization always  serves  as  a  means  of  apportioning 
interests,  and,  usually,  though  not  by  any  means  inva- 
riably, serves  also  as  a  measure  of  value. 

Thus,  a  partnership  business  owned  by  three  part- 
ners and  valued  at  $100,000  is  to  be  incorporated. 
One  partner  owns  a  half  interest  in  the  business  and 
the  other  two  each  own  a  one-fourth  interest.  Unless 
special  conditions  exist,  the  capitalization  of  the  cor- 
poration would  naturally  be  fixed  by  the  value  of  the 
enterprise  at  $100,000.  The  capitalization  is  then  a 
measure  of  value  of  the  enterprise.  This  capital  stock 
is  divided  into  shares  of  equal  value  and  in  the  ordi- 
nary course  of  procedure  in  such  an  incorporation 
each  partner  is  given  such  number  of  shares  as  will 
represent  his  interest.  If  the  shares  are  of  the  usual 
par  value  of  $100  each,  there  will  be  1,000  shares  in 
all,  of  which  the  first  partner  will  receive  500  and  the 
second  and  third  partners  250  each.  That  is,  their 
interests,  instead  of  being  represented  by  fractions  as 
before,  are  now  represented  by  shares  of  even  value, 
and  the  capitalization  not  only  represents  the  value  of 
the  enterprise,  but  serves  as  a  convenient  means  of 
apportioning  or  representing  the  interests  of  the 
owners. 

In  this  case  $100,000  as  the  value  of  the  business 
would  be  a  natural  capitalization.  It  is,  however, 
entirely  possible  that  for  reasons  of  policy  and  expe- 


1 68  FINANCING    AN    ENTERPRISE. 

diency,  a  less  amount,  as  $50,000,  might  be  decided 
upon.  The  laws  never  interpose  any  obstacle  to  capi- 
talization below  the  real  value  of  an  undertaking,  and 
such  a  proceeding  would  be  entirely  within  the  discre- 
tion of  the  partners.  The  smaller  capitalization  would, 
however,  be  no  longer  a  measure  of  the  value  of  the 
enterprise,  though  it  is  still  and  to  the  same  extent 
as  before,  a  convenient  means  of  apportioning  the 
respective  interests  of  the  partners.  In  other  words, 
the  function  of  capitalization  as  a  measure  of  value 
has  been  subordinated  to  presumably  more  important 
considerations  and  is  lost,  but  the  other  function — 
as  an  apportionment  of  interests — still  exists  in  full 
measure. 

That  this  is  true  is  shown  by  a  very  brief  consider- 
ation. Under  the  capitalization  of  $50,000,  shares 
being  $100  each,  the  first  partner  would  have  250 
shares,  the  second  and  third  partners  125  shares  each. 
The  number  of  their  shares  is  changed,  it  is  true,  but 
the  capitalization  being  correspondingly  changed,  their 
proportionate  holdings  and  their  interests  in  the  busi- 
ness and  in  its  profits  are  the  same.  The  first  partner 
still  has  a  half  interest  and  the  other  two  still  have 
one-fourth  interests  as  before.  If  profits  of  $10,000 
are  made  and  declared  as  dividends,  under  the  first 
capitalization  they  will  receive  a  ten  per  cent,  divi- 
dend, amounting  for  the  first  partner  to  $5,000  and 
for  each  of  the  others  to  $2,500.  Under  the  second 
capitalization  the  dividend  will  be  twenty  per  cent., 
but  the  amounts  received  by  the  partners  will  again 
be  $5,000  for  the  first  and  $2,500  each  for  the  other 


CAPITALIZATION.  169 

two.     The  basis  of  calculation   is   different,  but  the 
results  are  the  same. 

It  is  obvious  that  this  apportionment  of  interest  by 
means  of  capitalization  is  a  very  important  function. 
As  a  rule,  many  parties  are  invited  to  participate  in 
corporate  undertakings,  each  putting  in  or  investing  a 
small  sum.  Possibly  also,  if  the  corporation  be  a 
new  one,  commissions  and  other  obligations  are  to 
be  paid  by  stock  interests  in  the  enterprise  itself.  It 
is  clear  that  if  all  this  were  done  on  the  fractional 
basis  that  prevails  in  partnerships,  as  one-fifth  to  this 
man,  one-eighth  to  another,  four-fifteenths  to  another, 
one-twenty-fifth  to  another,  etc.,  very  complicated  and 
troublesome  problems  both  of  practice  and  bookkeep- 
ing would  arise.  Under  the  share  capitalization  used 
in  the  corporate  form  all  these  differences  of  interest 
are  represented  with  accuracy  and  convenience. 

At  times  a  capitalization  will  be  fixed  solely  for  the 
purpose  of  apportioning  interests  without  regard  to 
values,  and  then  later  as  conditions  change  will  itself 
be  changed  to  serve  as  a  measure  of  value  as  well. 
This  is  shown  very  clearly  by  a  case  that  frequently 
arises.  An  inventor  devises  some  mechanism.  It 
is  neither  demonstrated  nor  patented,  probably  exist- 
ing only  as  a  rude  draft  or  model.  The  device  must 
be  worked  out  and  for  this  purpose  the  inventor  must 
secure  financial  assistance. 

Usually  in  such  case  the  inventor  will  go  to  a  few 
of  his  friends.  Perhaps  in  order  to  secure  the  money 
he  needs  to  complete  the  invention — say  $1,000 — he 
will  offer  them  a  one-half  interest,  reserving  the  other 


170  FINANCING    AN    ENTERPRISE. 

half  for  himself.  Two  or  three  of  these  friends  may 
form  a  little  pool,  one  for  instance  putting  in  $500, 
another  $400  and  another  $100.  Then  their  respec- 
tive interests  in  the  enterprise  might  be  apportioned  by 
means  of  fractional  parts — one-half  to  the  inventor, 
one-fourth  to  the  first  friend,  one-fifth  to  the  second 
friend  and  one-twentieth  to  the  third.  Usually,  how- 
ever, the  corporate  form  would  be  preferred  on 
account  of  its  convenience  and  in  order  to  avoid  the 
partnership  obligations  that  might  exist  under  the 
first  plan.  Then  the  question  of  capitalization  arises. 
It  is  obvious  that  at  this  point  the  capitalization 
cannot  be  based  on  the  value  of  the  enterprise  for 
the  simple  reason  that  this  value  cannot  be  ascer- 
tained. The  invention  may  prove  impracticable;  it 
may  not  be  patentable;  it  may  have  been  already 
patented  by  some  one  else ;  it  may  never  be  brought  to 
perfection.  In  any  of  these  events,  the  invention  will 
be  worthless.  On  the  other  hand,  it  may  turn  out  a 
striking  success  and  be  worth  hundreds,  thousands  or 
even  millions  of  dollars,  according  to  its  nature.  It 
is  apparent,  then,  that  the  capitalization  of  the  enter- 
prise cannot  be  based  on  value,  and  its  only  function 
is  to  measure  the  interests  of  the  parties  concerned. 

In  this  case  the  amount  of  capitalization  is  practi- 
cally a  matter  of  indifference  and  is  fixed  at  any  con- 
venient figure  that  will  lend  itself  readily  to  the  re- 
quirements of  the  case.  Usually  to  avoid  incorporat- 
ing fees  and  expenses,  taxation,  etc.,  a  small  capital- 
ization is  preferable,  and  the  company  will  perhaps  be 
incorporated  for  say  $2,000,  divided  into  twenty  shares 


CAPITALIZATION.  I/I 

of  the  par  value  of  $ioo  each.  Of  these  the  inventor 
will  take  ten  shares,  the  first  friend  five  shares,  the 
second  four  shares  and  the  third  one  share. 

Such  a  little  company  would,  of  course,  be  looked 
upon  merely  as  a  temporary  "bridging"  arrangement 
to  carry  the  enterprise  over  to  a  point  where  the  value 
of  the  invention  might  be  determined.  The  only  parties 
concerned  are  the  inventor  and  his  associates  and  the 
arrangement  meets  the  needs  of  the  situation  very  fully. 

When,  however,  the  invention  is  completed  and  its 
value  can  be  determined  to  some  degree,  and  when 
perhaps  large  amounts  of  money  are  needed  for  its 
exploitation,  the  conditions  are  very  different.  Money 
in  material  amounts  could  hardly  be  raised  on  the 
existing  capitalization  of  $2,000.  This  must  be  in- 
creased to  an  amount  more  nearly  approaching  the 
value  of  the  enterprise.  The  corporation  will,  there- 
fore, if  the  invention  is  one  of  value,  be  reorganized 
and  capitalized  on  a  much  more  liberal  basis,  the  amount 
of  this  capitalization  then  becoming  a  matter  of  great 
importance.  Up  to  this  point  the  real  value  of  the 
enterprise  has  not  been  considered  in  its  capitalization. 
Now  the  idea  of  value  comes  in  and  the  capitalization 
is  not  only  to  serve  as  a  measure  of  interest,  but  as  a 
measure  of  value  as  well. 

It  is  apparent  from  the  examples  considered  that 
these  two  functions  of  capitalization  are  entirely  sepa- 
rate and  distinct.  Capitalization  may  or  may  not  be 
used  as  a  measure  of  value,  but  its  use  as  a  measure 
of  interest  is  practically  invariable. 

It  is  to  be  noted  that  theoretically  and  even  practi- 


172  FINANCING    AN    ENTERPRISE. 

cally  the  entire  value  idea  in  capitalization  may  be  dis- 
regarded. Under  the  existing  laws,  capitalization  must 
be  expressed  in  terms  of  money,  but,  as  already  shown, 
these  money  terms  frequently  do  not  indicate  in  any 
way  the  value  of  an  enterprise.  Therefore,  while  the 
capitalization  is  expressed  in  terms  of  money,  it  may  still 
be  considered  solely  from  the  standpoint  of  apportion- 
ing interests. 

For  instance,  in  the  inventor's  little  corporation  already 
cited,  the  first  capital  stock  of  $2,000  does  not  in  any 
way  express  the  value  of  the  enterprise.  Then,  instead 
of  calling  the  capitalization  $2,000,  consisting  of  twenty 
shares  of  the  par  value  of  $100  each,  the  "value"  idea 
might  be  dropped  entirely  and  the  capitalization  be  re- 
ferred to  merely  as  one  consisting  of  twenty  shares. 
Then  neither  the  money  value  of  the  total  capitalization 
nor  of  its  shares  would  be  mentioned  or  enter  into  con- 
sideration unless  in  case  of  sale.  The  inventor,  holding 
ten  shares  out  of  the  total  number  of  twenty  shares, 
would  have  one-half  the  enterprise,  and  these  ten  shares 
represent  his  half  interest  equally  well  whether  the 
value  of  the  enterprise  be  $2,000  or  $200,000.  In  this 
case  the  capitalization  is  regarded  purely  from  the  stand- 
point of  shares  and  not  of  value.  The  whole  idea  is  in 
fact  merely  a  convenient  modification  of  the  fractional 
interest  of  the  partnership. 

It  may  be  noted  that  in  New  York  corporations 
may  be  formed  on  the  basis  of  a  specified  number  of 
equal  shares,  but  of  no  definite  value,  the  dollar  idea 
being  entirely  omitted. 

The  general  proposition  is  "to  permit  the  formation 
of  a  distinct  class  of  business  stock  corporations  whose 


CAPITALIZATION.  173 

capital  stock  may  be  issued  as  representing  proportional 
parts  of  the  whole  capital  without  any  nominal  or  money 
value."  In  other  words,  if  any  particular  capitaliza- 
tion consisted  of  lOO  shares,  no  nominal  money  value 
would  be  placed  upon  these  shares,  each  one  merely 
representing  i-ioo  of  the  enterprise.  As  long  as  stock 
is  not  sold,  the  real  value  of  these  shares  would  be 
immaterial.  In  case  of  sale  their  value  would  have 
to  be  ascertained  either  from  market  quotations  or  by 
an  investigation  of  the  property  owned  by  the  corpo- 
ration. The  matter  not  being  complicated  by  the 
usual  fictitious  money  value  attached  to  each  share, 
is  not  difficult. 

This  very  radical  departure  from  the  usual  plan  of 
incorporation  has  not  met  with  popular  approval. 
The  idea  of  value  as  connected  with  capitalization  is 
too  firmly  fixed  to  be  easily  disturbed. 


CHAPTER  XVII. 
THE  BASIS  OF  CAPITALIZATION. 


The  laws  governing  the  organization  of  corporations 
undoubtedly  contemplate  an  initial  equality  between  the 
issued  capital  stock  and  the  corporate  assets, — in  other 
words,  as  the  issued  capital  stock  is  the  real  or  working 
capitalization  of  the  company,  that  the  enterprise  shall 
be  capitalized  on  the  basis  of  value.  In  some  few  states 
direct  laws  exist  to  enforce  this  equality  between  assets 
and  capitalization.  In  most  states  the  laws  with  more 
or  less  vagueness  prescribe  that  stock  shall  only  be 
issued  for  actual  value,  or  otherwise  the  party  to  whom 
it  is  issued  shall  be  liable  to  the  corporation  and  its 
creditors  for  the  difference  between  the  amount  he  has 
actually  paid  and  the  par  value  of  the  stock.  The  intent 
of  these  laws  is  clear.  Every  dollar  of  issued  stock 
must  represent  a  dollar  of  value  received  by  the  cor- 
poration, or  to  be  received  should  the  corporate  neces- 
sities require. 

In  practice,  however,  the  laws  regulating  capitaliza- 
tion are  too  often  evaded,  or  compliance  is  nominal, 
and  in  consequence  frequent  and  wide  discrepancies 
between  the  issued  capital  stock  and  the  corporate  assets 
are  found  from  the  very  day  of  incorporation.  The  value 
of  these  assets  is  professedly  taken  as  the  basis  of  capi- 
talization,  but   this   value    is   apparently    determined   by 


THE    BASIS    OF    CAPITALIZATION.  1 75 

the  exercise  of  the  liopes  or  imaginations  of  the  incor- 
porators rather  than  by  a  careful  appraisal. 

The  requirements  of  the  law  as  to  capitalization  merely 
shadow  forth  an  existing  popular  demand  that  it  shall 
be  based  on  values.  The  law  insists — somewhat  weakly, 
it  must  be  confessed — that  there  must  be  some  connec- 
tion between  the  value  of  an  enterprise  and  its  issued 
stock.  The  public,  in  spite  of  many  and  grievous  dis- 
appointments, goes  further  and  insists  not  only  that 
there  must  be,  but  that  there  is  some  such  connection. 

The  fact  that  the  nominal  value  of  stock  is  expressed 
in  terms  that  directly  convey  an  idea  of  definite  value 
is  probably  responsible  for  the  popular  position  on  this 
subject.  If  the  idea  of  value  were  dropped,  as  dis- 
cussed in  a  preceding  chapter,  and  shares  in  an  enter- 
prise were  merely  offered  as  proportionate  parts  of  the 
whole,  the  question  could  not  arise.  Even  at  the  time 
of  incorporation  it  could  hardly  be  insisted  that  some 
definite  amount  of  property  must  be  received  by  the 
corporation  for  every  share  issued,  if  no  value  were 
assigned  to  either  the  share  or  to  the  enterprise. 
The  only  claim  then  made  for  the  share  would  be  that 
it  represented  a  definite  part  of  the  whole,  and  no  repre- 
sentation as  to  its  value  being  made,  no  set  value  could 
be  required.  Under  these  conditions,  if  stock  were 
offered  for  sale,  the  principle  of  "caveat  emptor"  would 
control   as   in   any  other  ordinary  business  transaction. 

Then,  if  an  enterprise  were  represented  by  500  equal 
shares  and  a  man  were  offered  one  of  these  shares,  or 
in  other  words,  1-500  of  the  enterprise,  for  some  certain 
sum,  say  $100,  he   would,  if  interested,  at  once  begin 


176  FINANCING    AN    ENTERPRISE. 

an  investigation  to  determine  whether  this  share  were 
worth  $100,  just  as  before  purchasing  he  would  look 
up  the  value  of  a  horse  or  cow  or  any  other  article 
offered  for  sale. 

When,  however,  the  same  man  is  offered  a  share  of 
stock  stated  in  the  certificate  to  be  "of  the  par  value 
of  $100,"  while  he  may  still  investigate  the  offering  to 
determine  the  true  value  of  the  stock,  he  not  unnatur- 
ally proceeds  on  the  assumption  that  if  the  certificate 
says  it  is  of  the  value  of  $100,  that  value  it  ought  to  be 
unless  otherwise  expressly  stated  or  understood,  and  that 
if  it  is  not,  the  corporation  issuing  the  share  must  be 
either  more  or  less  of  a  failure  or  more  or  less  of  a 
fraud. 

Such  judgment  is  not  unjustified  nor  is  it  harsh. 
The  public  recognizes  the  fact  that  stock  may  rise  in 
value  if  the  enterprise  is  successful,  or  fall  from  its 
first  value  if  the  enterprise  is  unsuccessful,  just  as  the 
greenback  fell  below  par  when  troublous  times  beset 
the  Government,  but  the  share  purports  to  be  of  a  cer- 
tain money  value,  and  the  public  not  unreasonably  de- 
mands that  at  the  time  of  issue  at  least  this  professed 
value  shall  be  its  real  value. 

This  position  of  the  public,  in  spite  of  the  general 
knowledge  of  the  actual  conditions  and  the  uncertain- 
ties of  capitalization,  will  probably  continue  as  long 
as  the  nominal  value  of  stock  is  expressed  in  terms 
which  apparently  give  it  a  definite  value.  It  is  a  posi- 
tion that  must  be  taken  into  account  when  capitalization 
is  considered. 

It   is   to  be   observed   that   the   equality   of  corporate 


THE    BASIS    OF    CAPITALIZATION.  IJJ 

assets  and  issued  stock,  though  it  may  and  should  exist 
at  the  time  of  incorporation,  does  not,  as  already  inti- 
mated, usually  continue  to  exist  thereafter.  On  the 
contrary  the  relations  between  the  two  change  with 
every  vicissitude  of  the  business,  the  capitalization  being 
a  fixed  amount  only  to  be  changed  by  formal  procedure, 
while  the  value  of  the  enterprise  is  a  varying  amount 
fluctuating  with  every  success  or  reverse  encountered 
in  the  course  of  business. 

For  instance,  a  partnership  is  incorporated  for  $50,- 
000,  this  being  the  actual  value  of  the  business  at 
the  time  of  incorporation.  If  the  following  year  were 
a  prosperous  one,  the  net  profits  of  the  new  company 
might  perhaps  amount  to  $10,000.  These  profits,  until 
withdrawn  from  the  business,  increase  the  company's 
assets  by  that  amount.  Then,  while  the  capital  stock 
is  still  $50,000,  the  value  of  the  enterprise  is  $60,000, 
and  the  capitalization  is  no  longer  an  exact  measure  of 
value.  Or,  conversely,  this  same  company  might  expe- 
rience disastrous  reverses  and  lose  half  its  entire  assets. 
Then  the  value  of  the  business  would  be  but  $25,000, 
while  the  capitalization  still  stands  at  $50,000,  and  again 
fails  as  a  measure  of  value. 

In  quoted  stock  these  variations  between  the  value 
of  the  enterprise  and  its  capitalization  are  supposed 
to  be  reflected  with  more  or  less  accuracy  in  the  mar- 
ket quotations.  These  quotations  do  indicate  with  pre- 
cision the  selling  price  of  the  stock,  but  they  are  of 
doubtful  reliability  and  not  to  be  trusted  as  an  indica- 
tion of  the  real  underlying  value  of  the  enterprise.  In 
an   unquoted   stock  the   relations  between   capitalization 


1/8  FINANCING    AN    ENTERPRISE. 

and  the  value  of  the  enterprise  can  be  determined  only 
by  an  investigation  of  the  enterprise  itself. 

While  the  initial  capitalization  of  an  enterprise  should 
be  based  on  the  values  involved,  close  accuracy  is  usu- 
ally impossible.  Variations  within  reasonable  limits, 
however,  are  not  apt  to  be  attended  with  serious  results. 
In  case  of  an  over-capitalization  of  an  enterprise  to  be 
financed,  the  promoters  will  find  investors  wary  of  the 
offering  and  be  forced  to  increase  the  inducements.  In 
case  of  an  under-capitalization  the  same  face  value  of 
the  stock  will  probably  have  to  be  given  for  the  needed 
funds  as  would  be  the  case  if  the  corporation  were  more 
justly  capitalized,  which  is  in  effect  paying  more  for  the 
money.  Of  the  two,  if  within  bounds,  a  capitalization 
in  excess  of  the  present  values   is   perhaps   preferable. 

It  is  also  to  be  noted  that  usually  in  the  incorpora- 
tion of  a  new  enterprise  and  frequently  in  other  incor- 
porations, the  existing  value  of  the  enterprise  is  used 
only  as  a  basis  upon  which  to  build.  Future  needs  must 
be  provided  for,  present  necessities  and  requirements 
must  be  met,  and  as  a  result  the  capitalization  actually 
fixed  upon  is  far  in  excess  of  the  immediate  value  of 
the  enterprise. 

For  example,  an  inventor  may  have  designed  and 
perfected  a  new  form  of  dry  battery  and  be  desirous 
of  securing  capital  for  its  exploitation.  The  battery 
is  not  only  available  for  all  the  usual  purposes  of  a  dry 
cell,  but  is  of  less  construction  cost  and  of  longer  life. 
The  use  of  dry  cells  is  large  and  is  constantly  increas- 
ing, and  the  value  of  the  new  battery,  if  the  inventor's 
claims  are  correct,  is  considerable. 


THE    BASIS    OF    CAPITALIZATION.  1 79 

Under  these  circumstances  the  present  value  of  the 
patents  under  which  the  battery  is  held  might  be  de- 
termined with  some  accuracy  and  be  used  as  a  basis  of 
capitalization.  This  would,  however,  be  difficult,  and  in 
practice  the  inventor  would  usually  get  at  the  matter 
from  a  different  standpoint,  taking  the  amount  of  money 
needed  for  the  exploitation  of  his  patents  as  a  rough- 
and-ready  approximation  of  their  value,  or  as  a  basis 
upon  which  to  reckon  their  value.  In  the  present  in- 
stance he  might  deem  $25,000  cash  capital  as  ample  for 
the  development  and  operation  of  the  business  and  be 
willing  to  balance  his  invention  against  this  amount  of 
development  money.  This  proceeding  is  not  entirely 
logical,  but  is  common  in  practice,  the  relation  between 
the  money  and  the  invention  being  varied  according  to 
conditions  and  the  estimation  in  which  the  inventor 
holds  his  patents. 

In  the  case  discussed,  the  enterprise  being  balanced 
evenly  against  the  money,  we  have  a  total  value  for  the 
financed  enterprise  of  $50,000,  of  which  half  goes  to 
the  inventor  and  half  to  the  parties  putting  in  the  money. 
A  capitalization  on  this  basis  would  certainly  be  reason- 
able, entirely  proper  and  on  the  general  basis  of  value — 
this  value  not  being  that  of  the  patents  alone,  but  of  the 
financed  enterprise. 

If  the  invention  were  exceptionally  attractive  the  money 
might  possibly  be  secured  on  the  plan  proposed — that  is, 
on  an  offer  of  $25,000  in  stock  for  cash  to  the  same 
amount.  The  idea  of  par  for  stock  in  a  new  enterprise 
does  not,  however,  appeal  to  capitalists  as  a  rule. 
Therefore,  and  particularly  if  the  money  is  to  be  raised 


l8o  FINANCING    AN    ENTERPRISE. 

among  a  number  of  people,  a  larger  capitalization  would 
probably  be  necessary  in  order  to  offer  more  attractive 
inducements. 

If,  however,  the  amount  of  stock  to  be  offered  for 
capital  is  increased,  the  amount  of  stock  for  the  inventor 
must  also  be  increased  if  his  half  interest  is  to  be  pre- 
served. Usually  the  inventor  insists  on  this,  and  perhaps 
a  capitalization  of  $75,000  would  be  decided  upon,  $37,- 
500  of  which  would  be  retained  by  the  inventor  and  an 
equal  amount  be  given  for  the  money.  The  conditions 
then  have  caused  the  capital  stock  to  be  increased  by 
$25,000  without  any  increase  of  value  in  the  enterprise. 

It  may  be  objected  here  that  the  capitalists  are  get- 
ting but  one-half  the  enterprise  in  return  for  their  in- 
vestment just  as  at  first,  and  that  the  increased  induce- 
ments are  therefore  apparent  only  and  are  not  real. 
This  is  true,  but  nevertheless  an  offer  of  $37,500  of  stock 
out  of  a  total  of  $75,000  for  the  $25,000  of  cash  would 
be  more  attractive  than  the  offer  of  $25,000  in  stock 
out  of  a  capitalization  of  $50,000,  and  would  secure  the 
needed  money  quicker ;  first,  because  of  the  inherent 
tendency  of  civilized  man  to  attribute  to  stock  a  value 
equal  to  its  alleged  or  face  value,  which  gives  the  offer- 
ing more  attractiveness,  and  secondly,  because  of  the 
practical  advantages  found  in  the  larger  stock  issue — due 
somewhat,  but  not  entirely,  to  this  same  bargain-counter 
tendency  of  human  nature — in  case  of  later  sales. 

In  addition  to  the  capitalization  already  decided  upon, 
a  further  amount  might  be  added  to  provide  a  reserve 
for  future  contingencies.  Possibly  $25,000  of  stock 
might  be  allowed  for  these  future  needs  and  the  total 


THE    BASIS    OF    CAPITALIZATION,  l8l 

capitalization  of  the  company  would  then  be  $100,000, 
all  primarily  based  upon  the  original  enterprise  valued, 
when  financed,  at  $50,000.  The  stock  included  for  future 
needs  would  not,  however,  go  out  of  the  hands  of  the 
company  until  these  needs  arose,  and  until  that  time 
for  all  practical  purposes  the  capitalization  of  the  com- 
pany is  but  $75,000.  The  reserve  stock  would  neither 
vote,  draw  dividends  nor  usually  affect  the  company  in 
any  other  way.  It  would,  in  fact,  be  only  a  possibility — 
stock  to  be  issued  if  required,  but  until  then  non-effec- 
tive, and  for  all  practical  purposes  non-existent. 

It  may  be  noted  in  passing  that  the  laws  requiring 
full  payment  of  all  issued  stock  would,  in  the  case  of 
the  company  under  discussion,  meet  nominal  compli- 
ance through  the  very  elastic  value  of  the  patents. 
Twenty-five  thousand  dollars  of  the  stock  might  be 
properly  issued  full  paid  to  the  parties  investing,  in  ex- 
change for  the  equal  amount  of  cash  received  from 
them.  Fifty  thousand  dollars  of  stock  would  then  be 
issued  to  the  inventor  in  the  same  desirable  condition 
in  payment  for  the  patents.  Of  this  latter  stock,  $12,500 
would  be  turned  over  to  the  men  putting  in  the  money, 
thereby  making  up  their  full  $37,500,  and  the  remain- 
ing $37,500  would  be  retained  by  the  inventor. 

The  $25,000  of  reserve  stock  might  either  be  issued 
at  this  time,  the  same  very  accommodating  adjustable 
value  of  the  patents  being  utilized  for  its  full  payment, 
or  might  be  held  back  to  be  issued  later  when  needed. 
If  issued  at  the  time  the  patents  were  taken  over,  it 
would  be  nominally  issued  to  the  inventor  in  payment 
for  these  patents,  and  would  by  him  be  turned  back  to 


l82  FINANCING    AN    ENTERPRISE. 

the  company  as  a  donation.  The  only  advantage  in 
issuing  the  reserve  stock  at  the  time  of  incorporation  is 
to  secure  its  full  payment  by  means  of  the  patents.  If 
this  is  done  the  stock  is  known  as  "full-paid"  stock,  may 
be  sold  at  less  than  its  par  value  if  need  be  and  will 
not   carry   the   liabilities   that   accompany   unpaid   stock. 

In  some  undertakings  the  rate  at  which  stock  must 
be  sold  is  so  low  and  the  cost  of  selling  is  so  great, 
that  these  sale  requirements  are  the  main  considerations 
in  capitalization  and  the  real  values  involved  are  prac- 
tically disregarded.  This  is  often  the  case  in  mining 
enterprises  when  the  property  is  capitalized  far  in  excess 
of  any  existing  values  and  the  shares  are  then  sold  at  a 
small  percentage  of  their  face,  dollar  shares  perhaps  sell- 
ing at  one,  two  and  three  cents  a  share.  In  such  cases 
the  value  of  the  enterprise — and  its  capitalization  for 
dividend  purposes — may  be  approximated  by  a  calcula- 
tion based  on  the  amount  of  capitalizati(~»n  and  the  sell- 
ing price  of  stock. 

For  instance,  if  a  mine  is  capitalized  at  $1,000,000 
and  the  stock  is  offered  for  sale  at  three  cents  for  each 
dollar  share,  the  amount  received  if  all  the  stock  were 
sold  at  this  rate  would  be  $30,000,  which  therefore  rep- 
resents the  value  really  put  upon  the  mine  by  the  owners 
at  the  time  of  this  offering.  In  other  words,  the  mine 
has  been  capitalized  at  an  amount  exceeding  its  present 
value  by  $970,000.  As,  however,  the  matter  is  well 
understood  by  all  parties  and  the  general  equities  are 
preserved  by  the  small  price  at  which  the  stock  is 
offered,  the  practice  can  hardly  be  reprehended.  It  is 
supposed   to  be  a  capitalization  of  possible   values  and 


THE    BASIS    OF    CAPITALIZATION.  183 

is   considered   more    fully   in   the   present   volume   under 
that  head. 

From  the  standpoint  of  capitalization,  enterprises  may 
be  roughly  divided  into  four  classes,  as  follov^s : 

(i)  Those  in  which  the  capitalization  is  not  based 
on  value  and  its  amount  is  therefore  a  matter 
of  but  little  importance  or  of  absolute  indiffer- 
ence. 

(2)  Those  in  which  the  capitalization  is  based  upon 
the  present  value  of  the  enterprise. 

(3)  Those  in  which  the  capitalization  is  based  upon 
future  values  either  probable  or  possible. 

(4)  Those  in  which  the  value  of  the  enterprise  can 
only  be  determined  by  development  and  in  which 
the  amount  of  capitalization  is  therefore  fixed 

by  more  or  less  intelligent  estimates  and  guesses. 
This  classification  can  only  be  a  rough  grouping  and 
many  enterprises  will  be  found  that  cannot  be  satisfac- 
torily assigned  to  any  one  of  the  given  headings,  occupy- 
ing either  some  intermediate  position  or  partaking  of 
the  nature  of  two  or  more  of  them.  The  classification 
is,  however,  sufficient  for  the  present  purpose. 


CHAPTER  XVIII. 
CAPITALIZATION   NOT  BASED  ON  VALUE. 


Value  is  the  obvious  basis  of  capitalization.  There 
are  many  cases,  however,  where  other  considerations 
prevail,  the  value  of  the  enterprise  having  but  little  if 
any  weight  in  the  selected  capitalization. 

One  frequent  cause  of  this  departure  from  the  usual 
basis  is  the  inchoate  condition  of  the  enterprise  itself  in 
which  any  accurate  determination  of  value  is  impossi- 
ble. An  invention  in  its  first  stages,  as  discussed  in  a 
preceding  chapter  (Chapter  XVI)  is  a  common  ex- 
ample of  such  an  enterprise.  Here  the  value  of  the 
enterprise  is  an  unknown  and,  at  that  time,  absolutely 
unknowable  quantity.  The  device  may  be  a  failure  or 
prove  unpatentable  and  have  no  value  at  all.  On  the 
other  hand,  it  may  be  largely  successful  and  be  worth 
hundreds  of  thousands  of  dollars.  Manifestly  the  un- 
certainties are  too  great  to  permit  of  any  just  valuation. 

Under  such  circumstances,  if  others  are  to  be  inter- 
ested in  the  undertaking  and  it  is  to  be  incorporated, 
as  is  frequently  the  case,  the  capitalization  must  of 
necessity  be  fixed  entirely  irrespective  of  the  values  in- 
volved. Capitalization  then  merely  serves  to  apportion 
the  respective  holdings  of  the  interested  parties  and  its 
amount  is,  in  most  cases,  a  matter  of  but  little  im- 
portance. 

Such   capitalizations    are    merely    temporary    and    are 

184 


CAPITALIZATION    NOT   BASED  ON   VALUE.  185 

usually  placed  at  some  comparatively  small  figure  to 
avoid  the  incorporating  expenses  and  the  fees  and  tax- 
ation involved  in  larger  capitalizations.  Their  purpose 
is  to  carry  the  enterprise  over  from  its  condition  of 
absolute  indetermination  to  a  point  where  some  value 
has  been  demonstrated  or  can  be  ascertained.  Then  the 
enterprise  may  be,  and  usually  is,  recapitalized  on  the 
basis  of  value. 

Somewhat  allied  to  capitalizations  of  this  nature  are 
the  temporary  organizations  quite  common  when  large 
undertakings  are  to  be  incorporated.  Such  an  organi- 
zation is  a  small  preliminary  corporation  formed  for  the 
purpose  of  securing  the  corporate  name  and  holding 
the  enterprise  until  the  time  comes  when  this  enterprise 
may  be  taken  up  advantageously  by  the  larger  corpora- 
tion. It  is  a  temporary  "holding"  company  to  which  the 
options,  contracts  and  properties  then  in  hand  are  as- 
signed and  through  which  the  affairs  of  the  enterprise  are 
conducted  until  the  proper  point  has  been  reached  for 
the  formation  of  the  permanent  corporation.  Then,  the 
purpose  of  this  preliminary  organization  having  been 
accomplished,  it  is  merged  in  the  larger  corporation,  or 
otherwise  is  dissolved  and  abandoned. 

For  instance,  in  the  formation  of  the  United  States 
Steel  Corporation,  the  company  was  first  organized  with 
a  capitalization  of  $3,000.  This  very  modest  capitali- 
zation endured  for  a  period  of  less  than  six  weeks,  when 
the  affairs  of  the  "aggregation"  having  reached  the 
proper  point,  the  capitalization  was  raised  at  a  single 
bound  to  over  $1,000,000,000, — the  largest  bona  fide 
industrial  capitalization  in  the  world. 


1 86  FINANCING    AN    ENTERPRISE. 

In  cases  of  this  kind  the  capitalization  of  the  pre- 
liminary organization  is  again  a  matter  of  small  impor- 
tance. The  whole  arrangement  is  temporary  and  the 
capitalization  is  fixed  at  any  convenient,  but  usually 
small  amount. 

Close  corporations  form  another  class  in  which  capi- 
talizations not  based  on  value  are  frequent.  Here  there 
are  but  few  people  interested.  All  of  these  usually  partic- 
ipate actively  in  the  business,  stock  is  not  to  be  sold  and 
there  is  no  object  in  paying  the  fees,  taxes  and  other 
heavy  expenses  incident  to  a  large  corporation.  There- 
fore such  corporations  are  capitalized  at  some  nominal 
figure,  the  amount  selected  bearing  no  relation  of  any 
kind  to  the  real  value  of  the  enterprise.  The  amount 
of  capitalization  in  these  cases  is  commonly  a  matter 
of  indifference  except  in  so  far  as  the  incorporating 
expenses  and  subsequent  taxation  are  concerned,  which, 
as  stated,  usually  tend  to  fix  this  amount  at  a  low  figure. 

An  excellent  example  of  this  kind  of  corporation  is 
afforded  by  a  recently  incorporated  business  handling 
a  well  known  household  preparation.  For  over  thirty 
years  this  business  was  conducted  as  a  partnership,  the 
firm  being  composed  of  three  equal  partners  and  the 
annual  net  earnings  averaging  nearly  $12,000,  while  the 
assets  were  about  $6,000  exclusive  of  trade-marks  and 
good-will,  in  which  lay  the  great  value  of  the  business. 

On  account  of  some  changes  in  the  mutual  relations 
of  the  partners — one  of  them  retiring  from  the  active 
management — and  to  secure  the  permanence  of  the  busi- 
ness, incorporation  was  deemed  advisable.  The  proper 
capitalization   of  the   new   company   then   came   up    for 


CAPITALIZATION    NOT  BASED  ON  VALUE.  1 87 

consideration  and  it  was  soon  seen  that  as  between  the 
partners  this  amount  was  absolutely  immaterial.  None 
of  them  expected  or  desired  to  sell  stock,  and  no  matter 
at  what  figure  the  capitalization  was  fixed,  each  would 
have  his  one-third  of  the  total  amount  and  thereafter 
receive  his  one-third  of  the  profits  as  dividends.  Obvi- 
ously these  dividends  would  be  the  same  in  amount — 
though  not  in  percentage — whether  the  capitalization  was 
$1,000  or  $100,000.  Accordingly  the  value  of  the  busi- 
ness was  disregarded  and  the  capitalization  fixed  arbi- 
trarily. 

For  some  reason  not  divulged,  the  parties  in  interest 
decided  that  the  capitalization  should  either  be  $6,000 
or  $60,000  and  left  the  selection  to  their  attorney,  who 
promptly  settled  upon  the  smaller  amount,  and  the  com- 
pany was  thereupon  formed  with  a  capitalization  of 
$6,000,  each  party  to  the  incorporation  taking  $2,000 
face  value  of  the  new  stock. 

The  attorney's  decision  in  favor  of  the  smaller  capi- 
talization was  based  upon  a  general  feeling  of  conserva- 
tism, and,  more  directly,  upon  a  desire  to  avoid  the 
heavier  taxation  that  would  have  been  incurred  by  the 
$60,000  capitalization.  The  only  objection  that  could 
be  urged  against  the  small  capitalization  lay  in  the  fact 
that  the  dividends  paid  thereon — and  necessarily  shown 
by  the  details  of  the  franchise  tax  report  required  of 
New  York  corporations — would  be  so  excessive,  amount- 
ing to  200  per  cent,  per  annum,  as  to  provoke  comment 
and  possibly  arouse  dangerous  and  unnecessary  compe- 
tition. At  the  suggestion  of  the  attorney  in  charge,  this 
difficulty    was    overcome    by    the    distribution    of    the 


1 88  FINANCING    AN    ENTERPRISE. 

major  part  of  the  profits  as  salaries.  These  salaries  were 
undoubtedly  excessive,  but  as  each  of  the  former  part- 
ners received  an  equal  amount,  no  one  was  injured  and 
no  one  complained.  It  made  no  difference  to  them 
whether  they  received  their  profits  in  the  form  of  sal- 
aries or  dividends.  Under  the  plan  adopted  the  appar- 
ent profits  or  dividends  were  reduced  to  a  reasonable 
figure,  the  corporation  was  organized  and  the  business 
has  since  been  conducted  under  the  rather  absurdly  low 
capitalization  of  $6,000. 

The  matter  of  keeping  dividends  down  to  a  reasonable 
figure  is  occasionally  of  great  importance  and  brings 
about  another  condition  under  which  capitalizations,  ir- 
respective of  value,  are  sometimes  resorted  to. 

In  many  corporations,  while  excessive  profits  are 
greatly  desired,  excessive  dividends  are  not.  In  some 
cases  it  is  almost  a  business  necessity  that  they  be  avoid- 
ed. This  is  true  where  competition  would  be  attracted, 
or  where  enmity,  antagonism  and  perhaps  undesirable 
legislation  might  be  incited  by  unusually  large  dividends. 

In  such  cases  if  but  a  few  people  are  interested  the 
salary  plan  can  always  be  utilized  to  keep  dividends 
down  to  a  reasonable  figure.  When,  however,  a  number 
of  persons  are  involved,  the  salary  plan  is  not  practi- 
cable, and  the  real  values  are  then  abandoned  and  the 
capitalization  fixed  on  a  purely  dividend-concealing 
basis.  To  accomplish  this  it  is  apparent  the  capitaliza- 
tion must  be  placed  in  excess  of  the  real  values.  For 
instance,  if  a  business  is  capitalized  at  $50,000  and  is 
paying  thirty  or  forty  per  cent,  in  dividends  on  this 
amount,  the  dividends  can  be  materially  reduced  only  by 


CAPITALIZATION    NOT  BASED  ON   VALUE.  1 89 

a  liberal  stock-watering-.  Probably  the  capitalization  will 
be  doubled,  reducing  the  dividends  to  fifteen  or  twenty 
per  cent.  These  dividends,  while  still  liberal,  would 
not  be  excessive  for  most  commercial  undertakings  and 
would  not  be  apt  to  attract  attention  or  competition.  If 
they  were  still  too  large  to  be  safely  published,  the  capi- 
talization might  be  increased  to  $200,000,  reducing  the 
dividend  to  the  very  reasonable  figure  of  seven  and  one- 
half  to  ten  per  cent.  The  higher  fees  and  taxes  involved 
in  an  increased  capitalization  of  this  kind  are  looked 
upon  as  a  justifiable  and  even  necessary  expense  re- 
quired by  the  conditions. 

In  cases  of  this  kind,  the  increased  capitalization,  while 
primarily  adopted  to  conceal  dividends,  is  also  frequently 
justified  on  the  basis  of  profit  probabilities,  and  the  gen- 
eral subject  is  therefore  discussed  under  that  heading. 

Capitalizations  independent  of  values  also  occur  occa- 
sionally as  a  pure  matter  of  expediency,  as,  for  instance, 
in  the  recent  incorporation  of  a  prosperous  little  publish- 
ing business.  Here  the  value  of  the  business  was  first 
taken  as  the  basis  for  its  capitalization,  which  was  fixed 
at  the  sum  of  $12,500.  Before  application  had  been 
made  for  a  charter  it  was  found  that  the  trade  standing 
to  which  the  company  was  really  entitled,  or  to  which 
its  owners  thought  it  was  entitled,  would  not  be  secured 
under  the  capitalization  proposed.  Thereupon  the  value 
of  the  business  as  a  basis  of  capitalization  was  promptly 
abandoned  and  the  amount  of  capital  stock  was  arbi- 
trarily and  purely  as  a  matter  of  business  policy  raised 
to  $25,000. 

In  this  case  it  may  be  said  that  the  difference  between 


igO  FINANCING   AN    ENTERPRISE. 

value  and  capitalization  was  more  apparent  than  real, 
since  as  a  matter  of  fact  but  one-half  of  the  nominal 
capitalization  was  issued,  the  remaining  stock  being  held 
unissued  to  be  sold  for  additional  capital  later  or  to  be 
issued  as  a  stock  dividend  if  at  any  future  time  the 
increased  value  of  the  business  should  warrant  such  a 
step.  The  nominal  capitalization  was,  however,  twice 
the  real  value  of  the  business. 


CHAPTER  XIX. 

CAPITALIZATION    BASED    ON    PRESENT 
VALUES. 

(New  Enterprises.) 


The  proper  capitalization  of  a  new  enterprise  well 
within  the  ordinary  lines  of  business  is  a  simple  matter. 
For  instance,  a  young  merchant,  having  acquired  in 
subordinate  positions  a  thorough  knowledge  of  some 
particular  business,  may  decide  that  the  time  has  come 
for  independent  effort  and  the  organization  of  a  com- 
pany with  himself  at  its  head.  Good-will  does  not 
exist,  no  unknown  terms  are  involved,  and  the  capitali- 
zation of  the  new  concern  is  of  easy  determination.  The 
cash  or  other  property  put  into  the  new  business  repre- 
sents the  entire  value  of  the  enterprise  and  would  be 
the  obvious  measure  of  its  capitalization. 

Or,  if  the  young  merchant  excels  those  with  whom 
he  will  be  associated,  either  in  experience,  trade  con- 
nections, or  general  ability,  his  superior  qualifications 
and  greater  value  to  the  business  may  perhaps  be  recog- 
nized by  an  allotment  of  stock  in  addition  to  that  repre- 
senting the  actual  cash  or  property  invested  by  him. 
The  capitalization  will  then  be  necessarily  increased  by 
the  amount  of  this  stock  allotment. 

In  any  such  case  the  experienced  party  might  be  paid 
a  larger  salary  in  recognition  of  his   value  to  the  busi- 

191 


192  FINANCING   AN    ENTERPRISE. 

ness  instead  of  an  allotment  of  stock,  but  even  then 
such  salary,  in  part  at  least,  might  very  properly  be  paid 
in  stock,  thereby  relieving  the  strain  upon  the  immediate 
cash  resources  of  the  young  concern.  Stock  for  such 
a  purpose  is  usually  issued  to  the  recipients  in  the  form 
of  stock  salaries — so  much  stock  each  month  until  a 
certain  stipulated  total  is  reached — the  stock  when  issued 
becoming  full  paid  by  reason  of  the  services  given  in 
return. 

A  somewhat  similar  arrangement  is  not  uncommon 
when  the  services  of  some  desirable  party,  such  as  a 
successful  salesman,  an  expert  engineer,  or  a  capable 
superintendent  or  general  manager,  are  to  be  secured 
and  inducements  beyond  the  ordinary  salary  must  be 
offered.  In  such  a  case  the  stock  consideration  may 
be  given  in  the  form  of  a  stock  salary,  or  it  is  some- 
times set  aside  under  contract  to  be  paid  for  by  the 
party  for  whom  it  is  reserved  in  a  term  of  years  or  on 
easy  instalments,  or  it  may  perhaps  be  given  en  bloc 
without  restrictions  at  the  time  the  party  enters  the 
employ  of  the  company.  Sometimes  in  the  case  of  a 
manager,  a  stock  bonus  of  this  kind  will  be  made  condi- 
tional on  a  certain  specified  measure  of  prosperity  being 
reached  by  the  company  within  a  certain  time.  It  is 
then  a  strong  inducement  to  effort  on  the  part  of  the 
prospective  recipient. 

In  any  of  these  cases  the  amount  of  the  stock  bonus 
or  donation  is  comparatively  small,  usually  not  enough 
to  affect  the  capitalization  materially  one  way  or  the 
other.  Such  stock  payment  is,  however,  legitimate  with- 
out regard  to  its  exact  amount  and  is  properly  included 


CAPITALIZATION PRESENT    VALUES.  I93 

in  a  capitalization  on  the  basis  of  values.  It  represents 
real  value  because  the  business,  under  the  expert  man- 
agement secured,  is  worth  more  than  would  otherwise 
be  the  case. 

When  a  corporation  is  formed  to  actually  purchase 
a  going-  concern,  the  capitalization  is  also,  as  a  rule, 
easy  of  adjustment,  being  either  fixed  at  the  real  values 
involved  or  based  directly  upon  these.  In  this  case,  as 
far  as  the  new  corporation  is  concerned,  the  somewhat 
uncertain  element  of  good-will  does  not  enter.  Good- 
will exists  as  to  the  business,  it  is  true,  but  the  price  put 
upon  the  business  includes  this  good-will,  and  the  inter- 
ested parties  in  considering  capitalization  do  not  go 
behind  the  agreed  price.  Usually  the  purchasing  cor- 
poration will  be  capitalized  at  the  cost  of  the  business 
plus  any  operating  capital  and  reserve  deemed  advisable. 

When  the  transfer  of  the  business  is  to  be  made,  the 
parties  who  have  the  matter  in  hand  usually  either  pur- 
chase the  business  and  then  turn  it  in  to  the  corporation 
in  exchange  for  stock,  or  they  first  organize  the  corpor- 
ation, pay  for  its  stock  in  cash  and  then  take  tlie  funds 
so  secured  and  purchase  the  business  in  the  name  of  the 
corporation.  The  results  are  practically  the  same  in 
either  case.  Or  if  the  original  owners  are  to  be  in- 
terested in  the  new  corporation  and  agree  to  take  part 
or  all  of  the  purchase  price  of  the  business  in  stock, 
the  corporation  will  naturally  be  organized  at  once  and 
the  stock  be  issued  direct  to  them  in  payment  for  the 
business. 

Sometimes  it  happens  that  one  or  more  of  the  parties 
interested,  or  perhaps  an  outside  promoter,  will  secure 


194  FINANCING    AN    ENTERPRISE. 

an  option  on  a  business  at  one  price  and  then  turn  it  in 
to  the  purchasing  corporation  at  an  increased  price. 
Such  an  advance  in  price  represents  a  direct  profit  to 
the  promoter  or  other  interested  parties. 

In  any  such  case,  the  supposition  is  that  the  pro- 
moter has  secured  his  option  on  the  business  at  less 
than  its  real  worth  to  the  corporation  and  is  therefore 
entitled  to  a  profit  on  the  transaction.  That  is,  if  the 
business  were  held  under  option  by  the  promoter  at 
$45,000,  it  may  be  priced  to  the  corporation  at  $50,000 
or  more.  If  the  proposition  is  accepted,  the  position 
taken  by  the  accepting  parties  is  that  the  price  is  not 
in  excess  of  the  real  value  of  the  business  to  the  corpo- 
ration and  is  therefore  justified.  The  additional  capital 
stock  made  necessary  by  this  advanced  price  is  then 
looked  upon  as  a  legitimate  issue  on  the  basis  of  actual 
value. 

If  the  business  purchased  or  held  at  $45,000  is  to  be 
turned  in  to  the  corporation  at  $50,000,  the  capitali- 
zation of  the  company  will  probably  be  fixed  at  this 
latter  amount  plus  such  stock  as  is  needed  to  secure 
working  capital.  The  necessary  amount  of  this  work- 
ing capital  is  easily  determined  if  the  parties  are  expe- 
rienced in  the  particular  line  of  business.  Frequently 
the  only  question  is  whether  the  amount  of  cash  that 
can  be  secured  for  this  purpose  is  sufficient.  In  the 
present  case,  $25,000  in  stock  might  be  added  for  work- 
ing capital  requirements,  making  the  total  capitaliza- 
tion of  the  company  $75,000. 

If  the  business  were  really  worth  the  $50,000  at 
which  it  was  turned  in,  this  value  being  justified  by  its 


CAPITALIZATION PRESENT    VALUES.  I95 

present  condition  and  past  profits,  and  if  the  business 
standing-  and  reputation  of  the  parties  who  are  to  man- 
age the  corporation  is  good,  tliis  stock  provided  for 
■working  capital  should  bring  its  par  value. 

If,  however,  the  price  of  the  business  is  high  or  the 
reputation  of  the  parties  in  control  is  not  of  the  best, 
this  stock  would  probably  be  difficult  to  sell  at  any  price, 
and  unless  taken  by  the  interested  parties  themselves, 
would,  if  sold  at  all,  sell  much  below  its  face  value. 

If  it  is  anticipated  that  additional  capital  will  be 
needed  later,  the  capitalization  will  probably  be  increased 
still  further  at  this  time,  the  excess  stock  being  reserved 
for  issue  when  needed.  The  capital  stock  would  then 
be  $75,000  plus  the  amount  of  this  excess  stock.  Or 
the  company  might  be  capitalized  at  the  exact  amount 
needed  at  the  time,  and  when  the  necessity  for  more 
money  arose,  this  first  capitalization  be  increased  by  the 
requisite  amount  of  stock. 

The  first  plan  is  usually  preferred.  It  involves,  how- 
ever, heavier  incorporating;  fees  in  the  first  instance 
and  in  many  states  additional  taxation  thereafter.  There 
is  also  some  little  danger  in  carrying  a  stock  reserve  of 
the  kind.  It  may  be  a  temptation  to  extravagance  on 
the  part  of  the  management,  or  it  has  occasionally  oc- 
curred that  those  in  control  have  sold  such  reserved 
stock  at  a  figure  below  its  value,  making  a  private  profit 
for  themselves  by  such  sale,  or  have  sold  it  to  parties 
with  whom  they  are  co-operating,  thereby  securing 
control. 

Usually,  however,  such  dangers  are  negligible ;  the 
larger    incorporating    fees    have    to   be    paid    sooner    or 


196  FINANCING    AN    ENTERPRISE. 

later,  whether  the  stock  reserve  be  included  in  the  first 
capitalization  or  be  added  when  needed ;  the  additional 
taxation  is  light,  and,  as  a  rule,  any  such  reserve — if 
its  necessity  is  reasonably  apparent  and  not  too  remote — 
is  included  in  the  first  capitalization.  If  not,  and  the 
capitalization  must  be  increased  later,  considerable  ex- 
pense— mainly  for  legal  fees — and  trouble  are  involved, 
particularly  on  account  of  the  necessity  of  securing  the 
assent  of  all  or  a  large  portion  of  the  stockholders,  which 
is  required  in  most  states  and  which  is  occasionally  dif- 
ficult to  obtain. 

Sometimes  the  capitalization  of  a  new  enterprise 
otherwise  simple  is  complicated  by  the  necessity  for 
payments  to  promoters.  For  instance,  a  marble  quarry 
valued  at  $50,000  as  it  stands  is  owned  by  parties  who 
wish  to  operate  the  quarry,  but  lack  the  necessary  cash 
capital,  which  they  estimate  at  $25,000.  They  are  unable 
to  raise  this  amount  themselves  and  secure  the  services 
of  some  outside  party  or  promoter  to  raise  it  for  them. 

In  capitalizing  under  these  circumstances,  the  amount 
of  stock  to  be  offered  for  the  money  is  usually  the  first 
consideration.  This  w'ould  vary  with  the  desirability 
of  the  investment.  If  the  prospect  of  profits  were  suffi- 
ciently good,  stock  might  be  sold  at  par.  Ordinarily 
it  would  have  to  be  sold  at  less,  probably  much  less, 
say,  for  instance,  two  for  one,  $200  par  value  of  stock 
being  given  for  each  $100  of  cash.  This  then  w^ould 
fix  the  capital  stock  to  be  given  for  the  money  at  $50,- 
000,  which,  added  to  the  value  of  the  quarry,  would 
bring  the  capitalization  up  to  $100,000.  Then  the  com- 
pensation   of    the    promoter    nmst    be    considered.      His 


CAPITALIZATION PRESENT    VALUES.  1 9/ 

demands  would  vary  according  to  circumstances,  prob- 
ably ranging" — if  paid  in  stock — between  $5,000  and 
$25,000.  If  $10,000  of  stock  were  fixed  as  the  pro- 
moter's honorarium,  the  capitalization  would  be  brought 
up  to  $110,000.  To  this  would  probably  be  added  a 
reserve  for  contingencies,  of  say  $15,000,  making  the 
total  capitalization  of  the  company  $125,000. 

If  such  a  capitalization  could  be  fixed  in  this  way 
and  stay  "fixed,"  the  matter  would  be  simple.  In  prac- 
tice, however,  it  will  be  found  that  the  parties  investing 
their  money  object  to  a  direct  allotment  of  stock  to  the 
promoter.  They  are  willing  to  be  "discovered"  by  the 
promoter,  but  do  not  care  to  pay  for  this  discovery  so 
handsomely,  and  therefore  take  exception  to  the  pro- 
moter's stock,  which,  representing  no  material  value, 
merely  "waters"  the  capitalization  and  thereby  directly 
diminishes  the  value  of  their  interest.  To  remove  this 
objectionable  feature,  the  promoter's  quota  of  stock  is 
usually  concealed  in  that  retained  by  the  owners  of  the 
quarry.  In  other  words,  the  owners  apparently  retain 
$60,000  of  stock  for  themselves — this  really  including 
the  promoter's  fee — oflfer  $50,000  of  stock  for  $25,000 
in  cash  and  reserve  $15,000  of  stock  for  future  emer- 
gencies. 

Such  an  oflfering  is  "ragged"  and  not  well  balanced, 
and  it  is  also  to  be  noted  that  under  the  general  arrange- 
ment— if  carried  out — the  owners  will  have  but  $50,000 
of  stock  out  of  $110,000  actually  issued,  placing  them  in 
the  position  of  minority  stockholders.  It  is  also  to  be 
noted  that  the  men  with  money  would  look  upon  any 
odd  amount  of  reserve  stock,  such  as  $15,000,  as  "fair 


198  FINANCING    AN    ENTERPRISE. 

game"  and  would  probably  demand  that  it  be  added  to 
their  stock  as  a  condition  precedent  to  investment. 

To  obviate  these  difficulties  and  to  smooth  out  the 
general  offering,  the  capitalization  would  probably  be 
increased  to  $150,000,  of  which  $75,000  would  be  re- 
tained by  the  owners,  $50,000  be  offered  for  the  money 
required  and  $25,000  remain  as  a  reserve,  the  owners 
providing  for  the  promoter  out  of  their  stock.  The 
investors  would  probably  object  to  the  somewhat  scant 
provision  for  their  interests  and  demand  a  larger  quota 
of  stock,  but  might  perhaps  be  "pacified"  by  means  of 
stock  preferences  or  other  concessions  which  would  not 
disturb  the  general  adjustment.  Usually,  however,  they 
would  insist  upon  a  full  half  interest  for  their  money. 

If  the  capitalization  of  $150,000  is  adopted  and  the 
arrangement  carried  through,  the  issued  capitalization 
of  $125,000  represents  an  actual  property  value  of  but 
$75,000.  The  bonus  of  $25,000  given  for  the  money 
may  be  regarded  as  based  on  value,  because  of  the  imme- 
diately increased  value  of  the  enterprise  when  this  money 
is  secured,  as  may  also  the  payment  to  the  promoter, 
which  represents  the  accomplished  connection  between 
the  property  and  the  capital   required   for  its  operation. 

Such  payments  to  promoters  are  usual  and  necessary 
and  if  not  carried  to  excess  are  legitimate.  They  can 
Duly  be  looked  upon  as  a  part  of  the  consideration  given 
for  the  money — that  is,  in  the  present  instance  the 
$25,000  of  cash  actually  secured  cost  the  enterprise 
$60,000  of  its  stock.  The  only  justification  on  the  basis 
of  value  for  this  capitalization  is  the  fact — if  it  be  a 
fact — that    the    financed    enterprise    is    worth    the    whole 


CAPITALIZATION PRESENT    VALUES.  IQQ 

amount  at  which  it  is  capitalized.  This  proposition  could 
be  proved  or  disproved  only  by  the  subsequent  history 
of  the  undertaking.  It  is  really  a  capitalization  on  the 
basis  of  prospective  profits. 

Frequently  the  most  difificult  point  connected  with 
the  financing  and  capitalization  of  a  new  enterprise, 
when  out  of  the  established  lines  of  business,  is  to 
decide  what  amount  or  proportion  of  the  capital  stock 
must  be  offered  for  the  necessary  money.  This  will 
vary  with  the  conditions. 

For  instance,  an  inventor  has  devised  an  attachment 
to  the  ordinary  photographic  camera  by  means  of  which 
the  convenience  of  the  instrument  is  much  increased. 
His  invention  is  worked  out  in  detail,  is  fully  patented, 
has  been  tested  in  actual  use  and  better  still,  cameras 
of  the  new  design  have  been  actually  made  and  sold 
and  are  now  in  use,  showing  that  the  idea  is  good  and 
that  it  has  a  field  for  exploitation. 

In  this  case  it  is  possible  for  the  inventor  to  manu- 
facture and  sell  his  improved  camera  with  his  present 
equipment.  This,  however,  is  so  crude  and  inadequate, 
and  the  inventor's  means  are  so  limited,  and  his  output 
is  therefore  so  small  and  at  such  an  excessive  cost,  that 
the  profits  of  the  business  so  conducted  would  hardly 
support  him.  Under  such  conditions  the  enterprise  could 
not  build  up  from  its  own  profits,  and  additional  capital 
must  be  secured  if  the  business  is  to  prosper. 

Five  thousand  dollars  will  equip  a  modest  little  fac- 
tory and  start  the  business  on  such  a  scale  that  its  suc- 
cessful operation  is,  under  good  management,  reason- 
ably certain.    The  inventor,  therefore,  has  decided  to  or- 


200  FINANCING    AN    ENTERPRISE. 

ganize  a  corporation  and  dispose  of  sufficient  stock  to 
secure  this  needed  $5,000,  and  the  question  of  capitali- 
zation is  now  under  consideration. 

In  this  case  and  in  mose  similar  cases  there  is  no 
object  in  capitalizing  beyond  the  amount  actually  nec- 
essary to  represent  the  inventor's  interests  and  to  enable 
an  attractive  ofifer  to  be  made  for  capital.  The  business 
can  build  up  on  its  own  profits.  The  present  necessi- 
ties are  all  then  that  need  be  considered  and  the  prob- 
lem narrows  down  to  the  amount  of  stock  that  must  be 
offered  for  the  required  $5,000,  and  in  connection  there- 
with the  amount  of  stock  that  the  inventor  may  reason- 
ably expect  to  keep  for  himself.  These  two  amounts 
will  form  the  total  capitalization  of  the  corporation. 

Few  as  are  these  points,  the  problem  is  a  somewhat 
diflficult  one.  The  enterprise  is  not  one  which  offers 
any  promise  of  great  wealth  to  the  interested  parties. 
It  has  merit  but  only  sufficient  to  build  up  and  sustain 
a  good  business  under  a  moderate  capitalization,  modest 
expectations  and  good  management.  The  financed  un- 
dertaking might  very  fairly  be  valued  at  $15,000.  Put- 
ting the  business  itself  at  $10,000,  the  company  would 
theoretically  be  capitalized  at  $15,000,  of  which  amount 
$10,000  should  go  to  the  inventor  and  $5,000  to  the  capi- 
talist. This  would  be  a  fair  and  moderate  capitalization 
on  which  excellent  dividends  could  undoubtedly  be  paid, 
and  considering  the  effective  condition  of  the  invention 
and  the  enterprise,  would  not  be  unreasonable. 

In  practice,  however,  the  inventor  would  have  to  be 
a  hypnotist  of  the  first  order  to  get  his  money  on  any 
such  "bed-rock"  basis,  and  as  he  does  not  possess  abil- 


CAPITALIZATION PRESENT    VALUES.  201 

ities  of  this  kind,  a  more  liberal  oflfer  will  undoubtedly 
be  necessary. 

Probably  the  inventor  will  compromise  on  a  capitali- 
zation of  $15,000,  one-half  going-  to  the  man  with  money 
and  the  other  half  to  the  inventor.  Under  this  propo- 
sition, if  the  inventor  can  find  the  right  man,  he  will 
probably  get  the  money.  If  not,  he  may  have  to  oflfer 
more  attractive  inducements  and  will  then  capitalize  at 
$20,000  or  $25,000,  one-half  going  to  the  man  with 
money  and  the  other  half  to  the  inventor  as  before. 
The  increased  inducement  to  the  man  with  money  is 
obviously  more  apparent  than  real,  but  nevertheless  the 
larger  oflfering  is  more  apt  to  secure  the  money. 

In  this  case,  if  the  inventor  finds  it  necessary  to 
secure  the  assistance  of  a  promoter  in  obtaining  his 
money,  the  capitalization  is  likely  to  be  larger,  and  the 
man  with  money  will  then  take  half  and  the  inventor 
take  what  the  promoter  leaves  him.  If  the  promoter 
were  conservative,  the  enterprise  would  probably  be 
capitalized  at  from  $20,000  to  $25,000,  of  which  the  man 
putting  in  the  money  would  get  one-half,  the  inventor 
about  one-third  and  the  promoter  the  remainder.  If  the 
promoter  were  not  conservative,  the  enterprise  would 
probably  be  capitalized  at  from  $50,000  to  $100,000,  with 
a  generous  reserve  in  the  treasury  to  give  an  air  of  con- 
servatism and  a  liberal  distribution  of  the  remaining 
stock  to  interested  parties,  and  particularly  to  the  pro- 
moter. 

In  a  matter  of  this  kind  $20,000  or  even  $25,000  could 
hardly  be  deemed  an  excessive  capitalization.  The  com- 
pany will  probably  pay  dividends  on  that  amount,  and 


202  FINANCING   AN    ENTERPRISE. 

even  if  it  should  not  do  so,  the  consequences  would  not 
be  very  serious,  particularly  if  the  enterprise  were  kept 
in  the  hands  of  the  original  parties.  Even  if  others  were 
asked  to  participate,  the  enterprise  is  so  small,  so  open 
and  so  within  the  standards  of  ordinary  business  judg- 
ment that,  barring  misrepresentation,  the  parties  pur- 
chasing stock  could  hardly  have  ground  for  complaint 
of  the  capitalization. 

No  definite  rule  can  be  laid  down  as  to  the  offer  that 
must  be  made  to  secure  money.  It  will  not  only  vary 
with  the  enterprise  but  will  vary  in  the  same  enterprise 
according  to   the   method   adopted    for   securing   money. 

For  instance,  a  new  and  reasonably  attractive  inven- 
tion valued  in  a  financed  condition  at  $200,000,  may  re- 
quire $25,000  for  operating  funds.  If  the  owners  can- 
not provide  these  funds,  stock  must  be  given  to  the  cap- 
italist to  such  amount  as  will  secure  this  money,  the 
balance  of  the  stock  remaining  as  the  property  of  the 
owners.  In  such  a  case  the  capitalization  might  very 
well  be  placed  at  the  value  of  the  financed  enterprise — 
$200,000. 

If  the  larger  investors  are  appealed  to,  it  would,  unless 
the  enterprise  were  unusually  attractive,  be  necessary 
to  give  $100,000  in  stock  or  even  more  for  the  required 
$25,000.  If,  however,  the  investment  is  apportioned 
among  a  numlier  of  smaller  investors,  e'lch  one  i)uttini::; 
in  a  few  hundred  or  a  few  thousand  dollars,  it  is  prob- 
able that  from  $50,000  to  $75,000  face  value  of  the  stock 
or  even  less  would  be  quite  sufficient  to  get  the  money. 

Under  the  second  plan  the  stock  given  for  the  money 
would    be    at    least   $25,000    less    than    under    the   first. 


CAPITALIZATION PRESENT    VALUES.  2O3 

Against  this,  however,  must  be  set  the  additional  trouble 
of  reaching  smaller  investors.  In  either  case,  if  the 
services  of  promoters  were  necessary,  the  cost  of  get- 
ting the  money  would  be  increased  by  the  amount  given 
these  promoters,  the  value  of  the  owner's  interest  dimin- 
ishing as  the  amount  of  stock  given  for  the  money  in- 
creases. 

As  the  nature  of  the  enterprise  departs  more  widely 
from  the  conventional  and  established,  the  difficulties 
of  capitalization  increase  on  account  of  the  difficulty  of 
determining  values. 

The  value  of  a  new  typewriter,  for  example,  can  be 
estimated  by  experts ;  the  worth  of  a  new  engine  would 
not  be  hard  to  determine,  nor  would  the  valuation  of  an 
improved  steam  gage  be  difficult.  Standards  of  com- 
parison exist  for  all  these  and  their  approximate  value 
and  the  capitalization  to  be  based  upon  it  are  easily  as- 
certained. 

So  also  in  an  enterprise  of  a  definite  character,  such 
as  a  coal  company  formed  to  develop  and  operate  cer- 
tain properties.  The  cost  of  the  properties  is  known,  the 
expense  of  opening  them  and  equipping  the  mines  can 
be  quickly  and  accurately  determined  by  mining  engi- 
neers, the  necessary  operating  capital  is  even  more  easily 
estimated  and  the  proper  capitalization  on  a  strictly  in- 
vestment basis  is  the  sum  of  all  these,  with  perhaps  a 
reasonable  emergency  margin  added. 

If,  for  example,  the  coal  lands  to  be  acquired  by  the 
new  company  were  priced  at  $75,000,  the  expense  of 
equipment  and  development  to  a  self-sustaining  basis 
be  estimated  at  $40,000,  and  the  working  capital  fixed 


204  FINANCING    AN    ENTERPRISE. 

at  $15,000,  the  aggregate  of  these  three,  or  $130,000, 
would,  generally  speaking,  be  the  proper  capitalization 
of  the  enterprise.  If  any  subsequent  enlargements  or 
improvements  or  additional  equipment  were  contem- 
plated, too  expensive  to  be  provided  for  out  of  current 
profits,  the  capital  stock  might  be  increased  to  provide 
for  these  additional  funds,  say  to  $150,000,  or  even  to 
$200,000,  the  excess  stock  being  held  unissued  until 
needed. 

Such  a  capitalization  is  on  a  strictly  investment  basis 
and  the  stock  should  be  sold  at  par  and  for  cash.  If 
the  mine  were  successful,  the  enterprise  would  pay 
handsome  and  even  excessive  dividends.  Usually  such 
an  enterprise  would  be  capitalized  on  the  basis  of  these 
probable  profits  as  discussed  in  Chapter  XXI  of  the 
present  volume. 

The  capitalization  of  an  awarded  contract  is  another 
example  of  a  comparatively  easily  determined  capitaliza- 
tion. Here,  let  us  assume,  a  contractor,  after  securing 
a  harbor  dredging  contract,  wants  money  to  carry  out 
his  undertaking.  He  is  an  experienced  contractor,  and 
has  undertaken  the  work  at  the  rate  of  twenty-two  cents 
a  cubic  yard.  Having  no  plant  of  his  own,  there  are 
two  courses  open  to  him — to  equip  and  operate  his  own 
plant  or  to  sublet  the  contract,  probably  to  two  or  three 
different  parties.  He  finds  he  can  sublet  at  an  average 
price  of  eighteen  cents  per  yard.  He  can  remove  the 
material  himself  at  a  less  price  if  he  equips  his  own 
plant.  He  would,  therefore,  be  governed  by  the  partic- 
ular conditions  as  to  whether  to  operate  it  himself,  or 
sublet  and  merely  supervise  the   work  of  his  sub-con- 


CAPITALIZATION PRESENT    VALUES.  205 

tractors.  If  he  decides  to  sublet,  the  amount  of  capital 
needed  for  supervision  purposes  is  so  small  that  ordi- 
narily he  would  provide  it  from  his  own  private  re- 
sources, or  obtain  it  on  favorable  terms  by  loan  or 
through  some  special  proposition  to  his  friends,  and  a 
capitalization  would  not  be  necessary. 

If,  however,  he  decided  to  undertake  the  work  him- 
self, a  very  considerable  capital  would  be  required, 
ranging  anywhere  from  $50,000  to  $250,000  or  more, 
according  to  the  extent  of  the  undertaking.  A  con- 
tractor of  experience  would  very  easily  estimate  quite 
accurately  the  amount  necessary  for  plant  and  equip- 
ment, also  for  operating  and  emergency  funds — say 
$200,000  for  all.  To  this  in  fixing  the  capitalization 
of  his  company  he  might  add  a  fair  amount  of  stock 
as  his  own  profit  on  the  transaction,  the  amount  vary- 
ing with  the  conditions.  If  the  contract  is  a  good  one, 
and  his  personal  services  are  to  be  devoted  to  the  work, 
$50,000  face  value  of  the  stock  of  the  company  in  addi- 
tion to  a  salary  would  not  be  an  exorbitant  profit  for  the 
contractor.  This  would  fix  his  capitalization  at  $250,000, 
provided  he  can  dispose  of  the  $200,000  of  stock  at  par. 

If  he  does  this,  his  own  stock  apparently  represents 
a  net  profit  of  $50,000  at  the  first  "clatter  out  of  the 
box."  Really  it  does  nothing  of  the  kind.  All  his 
stock  represents  is  a  twenty  per  cent,  interest  in  the 
undertaking.  It  is  true  that  the  company  has,  if 
financed  on  the  terms  suggested,  $200,000  cash,  and 
his  stock  has  therefore  an  actual  immediate  value  of 
twenty  per  cent,  of  this,  or  $40,000,  but,  outside  of 
actual    fraud    or   bad    faith,    he    cannot    realize   on    this 


2o6  FINANCING    AN    ENTERPRISE. 

value  except  by  making-  the  enterprise  a  success,  and 
the  vahie  of  his  holding  will  depend  entirel)'  upon  the 
manner  in  which  he  works  the  enterprise  out. 

If  he  makes  a  failure  of  it,  his  stock  will  at  the  best 
only  represent  an  interest  in  a  depreciated  plant  and  a 
discredited  company.  If  he  makes  a  success,  it  will 
bring-  him  substantial  profits  on  the  particular  contract 
and  leave  him  a  twenty  per  cent,  interest  in  a  first- 
class  operating  company  of  recognized  position  and 
standing. 

In  order  to  prevent  any  profits  in  a  case  of  this  kind 
to  the  contractor  or  promoter,  unless  he  is  successful, 
the  stock  for  which  cash  has  been  paid  is  frequently 
issued  as  preferred  stock  with  a  fixed  and  also  a  par- 
ticipating dividend  and  a  prior  interest  in  the  company 
property.  Then  unless  successful  the  contractor  de- 
rives neither  profit,  property  nor  professional  reputa- 
tion from  the  undertaking  and  his  stock  is  utterly 
valueless.  This  arrangement  is,  under  most  circum- 
stances, very  fair  to  all  parties  and,  if  the  contractor 
is  acting  in  good  faith,  should  not  be  objected  to  by 
him. 

A  contract  of  the  kind  cited  might  very  properly  be 
capitalized  at  a  much  higher  figure  on  the  basis  of  prob- 
able profits.  The  illustration  is  discussed  further  in 
Chapter  XXI,  "Capitalization  Based  on  Profit  Proba- 
bilities." 


CHAPTER  XX. 

CAPITALIZATION   BASED  ON   PRESENT 

VALUES. 

(Going  Concerns.     Good-will.) 


When  a  going  concern  is  incorporated,  its  capitali- 
zation presents  a  problem  not  found  in  a  new  enterprise, 
viz.,  good-will.  This  good-will  is  the  profit-producing 
power  of  an  established  business  beyond  mere  interest 
and  replacement  returns  on  the  material  value  of  the 
capital  and  property  invested.  It  is  a  belonging  of  the 
business,  but  an  intangible  and  sometimes  very  evanes- 
cent belonging,  possessing  a  value  fluctuating  according 
to  its  volume,  its  stability  and  the  firmness  with  which 
it  is  linked  to  the  particular  business.  It  usually  repre- 
sents an  investment  already  made,  of  time,  money,  atten- 
tion or  general  business  ability,  or  it  may  come  without 
effort  from  purely  fortuitous  circumstances.  In  any  case, 
provided  only  that  it  can  be  held,  it  is  an  asset  of  value 
to  be  included  in  any  capitalization  of  a  business  just 
as  are  the  goods,  the  real  estate  or  an}-  other  belongings. 

It  is  obvious,  however,  that  when  the  good-will  is  of 
such  a  nature  that  it  will  not  stay  with  or  follow  the 
business,  it  is  valueless  to  a  purchaser  of  that  business. 
From  this  negative  value  good-will  runs  up  the  scale 
until  in  some  lines  of  business  we  find  it  is  the  most 
valuable  asset  and  sometimes  the  sole  asset  of  material 
value. 

207 


208  FINANCING    AN    ENTERPRISE. 

A  good-will  not  linked  to  the  business  in  which  it  is 
enjoyed  and  either  not  following  it  at  all  or  only  to  a 
limited  degree  is  usually  a  good-will  personal  to  some 
individual  connected  with  that  business.  In  such  a  case 
its  existence  is  due  to  or  depends  upon  the  popularity, 
acquaintance,  connections  or  other  conditions  peculiar 
to  the  party  around  whom  it  revolves.  Trade  is  perhaps 
brought  to  the  establishment  by  friends  of  this  party 
who  will  go  far  out  of  their  way  to  patronize  his  con- 
cern, or  perhaps  he  has  influential  relatives  who  use 
their  position  for  his  advantage,  or  possibly  he  is  such 
a  "jolly  good  fellow"  that  people  drop  in  just  for  the 
purpose  of  enjoying  his  society.  Or  it  sometimes  hap- 
pens he  is  such  an  expert  in  his  line  of  business  that 
people  will  come  from  far  and  near  because  they  get 
better  work  or  better  goods  from  him  than  from  others. 

In  any  such  case,  should  the  party  who  is  a  "draw- 
ing card"  leave,  a  very  limited  proportion  of  the  trade 
will  probably  remain  with  his  successor,  but  the  greater 
portion  will  follow  the  individual  upon  whom  it  is 
centered,  or,  if  he  is  no  longer  accessible,  will  scatter 
and  be  lost  to  the  particular  establishment.  Such  a  good- 
will is  a  most  valuable  asset  to  the  party  to  whom  it 
belongs,  but  is  of  little  or  no  permanent  value  to  the 
establishment  with  which  he  is  connected  unless  this 
individual  is  directly  interested  in  its  business  or  can 
be  firmly  held.  If  this  is  not  the  case  the  good-will  is 
not  an  asset  that  can  properly  be  considered  in  the  capi- 
talization of  the  concern. 

The  good-will  of  most  professional  businesses,  in 
places  where  competition  exists,   is   largely  of  this  na- 


CAPITALIZATION PRESENT    VALUES.  2O9 

ture.  Many  of  the  medical  and  legal  practices  in  the 
City  of  New  York  are  worth  up  into  the  tens  and  even 
hundreds  of  thousands  of  dollars  annually.  Their  value, 
however,  rests  almost  entirely  in  their  good-will,  and  if 
a  practice  were  sold,  this  would  not  bring  a  tithe  of  the 
amount  a  good-will  of  equal  productive  power  would 
in  other  lines  of  business. 

To  such  an  extent  is  this  true  in  the  law  that  prac- 
tices are  seldom,  if  ever,  sold,  simply  because  the  goods 
cannot  be  delivered.  The  only  way  in  which  the  mat- 
ter can  be  approached  with  success  is  by  the  introduc- 
tion of  a  partner  or  associate  who  by  slow  degrees  works 
into  the  confidence  of  the  old  patrons  and  gains  a  knowl- 
edge of  their  personality  and  business,  which  will,  if 
the  new  man  be  of  the  proper  calibre  and  general  quali- 
fications, eventually  lead  to  the  inclusion  of  himself 
within  the  precincts  of  the  existing  good-will. 

In  medical  matters,  good-will  can  be  transferred  with 
more  success — though  the  transfer  is  difficult  and  waste- 
ful— and  as  a  consequence  the  sale  of  practices  is  much 
more  common  in  medicine  than  in  the  law.  Even  here 
the  best  way  to  approach  the  practice  is  by  a  gradual 
system  of  transfer  through  the  medium  of  a  partnership. 
Nevertheless,  if  a  competent  stranger  buys  the  business 
outright  he  has  the  first  chance  at  the  practice,  and  if 
he  be  well  qualified  and  skillful,  will  probably  hold  the 
greater  portion. 

In  this  country  the  sale  of  medical  practices  is  not 
so  common  as  to  have  established  any  general  rule  for 
the  estimation  of  their  value.  In  England,  where  the 
good-will  of  a  professional  practice  is  a  much  less  fragile 


2IO  FINANCING    AN    ENTERPRISE. 

article  on  account  of  the  more  firmly  established  condi- 
tions and  the  greater  reluctance  of  the  people  to  change, 
the  value  of  a  medical  practice  generally  ranges  from  one 
to  two  years'  annual  receipts ;  that  is,  if  the  practice 
brings  in  $5,000  a  year,  its  selling  price  is  fixed  at  from 
$5,000  to  $10,000,  according  to  the  conditions.  The  ele- 
ment of  personal  services  rendered  enters  into  a  trans- 
action of  this  kind  in  such  a  way  as  to  obscure  the  actual 
value  of  the  good-will,  but  after  making  allowance  for 
this,  it  is  obvious  that  its  valuation  is  but  a  fraction  of 
what  it  would  be  if  more  firmly  held. 

In  commercial  circles  the  conditions  are  usually  very 
different.  Here,  in  some  cases,  good-will  constitutes  the 
chief  asset  of  a  prosperous  business  and  is  practically 
the  only  factor  to  be  reckoned  with  in  its  capitalization. 
To  this  class  belong  many  of  the  businesses  based  upon 
proprietary  articles.  In  these  the  good-will,  as  carried 
by  the  trade-names  and  the  trade-marks,  is  often  valued 
at  hundreds  of  thousands  of  dollars,  while  the  property 
assets  are  comparatively  insignificant,  and  formulae 
equally  as  good  as  those  by  which  the  articles  are  pre- 
pared could  in  many  cases  be  secured  for  little  or 
nothing. 

Take,  for  example,  "Pond's  Extract,"  to  which  ref- 
erence has  been  made  in  a  preceding  chapter.  Its  com- 
position is  well  known.  Practically  the  same  extract 
under  other  names  is  manufactured  by  half  a  dozen 
different  concerns,  but  people  are  used  to  the  name 
"Pond's  Extract"  and  will  have  none  of  these  others. 
Or  take  such  a  well-established  article  as  "Sapolio.'' 
It  is  unquestionably  a  very  excellent  preparation  for  its 


CAPITALIZATION PRESENT    VALUES.  2X1 

purposes.  An  equally  good  and  cfificient  preparation 
could,  however,  be  compounded  by  almost  anyone  versed 
in  the  art.  The  formula  is  a  mere  incident — a  very  im- 
portant one,  a  very  necessar}  one,  and  one  at  times  very 
difficult  to  obtain,  but  still  merely  an  incident.  The 
article  must  have  merit  if  the  business  is  to  be  worked 
up  and  sustained,  and  it  must  be  of  a  suitable  nature, 
but  beyond  this  its  composition  is  a  matter  of  much  in- 
difference— provided  only  that  it  is  inexpensive.  An 
expensive  compound  would  not  leave  the  very  liberal 
margin  for  advertising  and  other  publicity  work — 
amounting  in  the  case  of  sapolio,  it  is  said,  to  not  less 
than  $i,ooo  a  day — that  is  mainly  instrumental  in  the 
building  up  of  such  a  good-will. 

Given  a  formula,  though  it  be  satisfactory  in  every 
way,  and  the  first  step  has  hardly  been  taken.  Years 
of  arduous  effort,  ingenious  advertising  and  heavy  ex- 
pense are  requisite  before  a  good-will  such  as  that  now 
enjoyed  by  sapolio  can  even  be  approximated.  Nor  is 
this  expense  due  to  the  cost  of  stock,  preparation,  etc. 
All  this  is  a  mere  item.  The  real  expenditures  are  found 
in  the  advertising,  the  general  pushing  and  the  con- 
sumption of  very  capable  brain  matter,  which,  if  prop- 
erly and  perseveringly  continued,  finally  lead  up  to  the 
monumental  good-will  of  the  successful  proprietary 
businesses.  Indeed,  it  may  be  said  that  with  a  fairly 
good  article  of  general  use,  capable  of  being  produced 
cheaply  and  sold  at  a  fair  price,  with  plenty  of  money 
for  pushing  and  with  the  intelligent  and  continued  use 
of  this  money,  success,  and  large  success,  is  a  mere  mat- 
ter of  course.     The  fairly  good  article  is  not  difficult  to 


212  FINANCING   AN    ENTERPRISE. 

secure;  at  times  much  difficulty  is  experienced  in  secur- 
ing the  requisite  money  and  the  experienced  inteUigence 
requisite  for  success. 

The  same  firm  that  controls  sapolio  well  illustrated 
the  general  principles  involved  in  building  up  the  good- 
will of  a  proprietary  article  by  their  more  recent  exploi- 
tation of  "hand  sapolio."  In  its  general  composition 
the  material  is  but  little  if  anything  more  than  the  old 
"sand  soap"  which  has  been  in  use  for  generations.  It 
is,  however,  a  meritorious  article  of  general  use  and 
capable,  it  seems,  when  judiciously  presented,  of  being 
sold  at  retail  for  ten  cents  a  cake — a  price  affording  the 
handsome  margin  of  profit  essential  in  an  exploitation 
of  this  kind.  The  concern  had  then  a  good  article. 
They  already  possessed  the  other  two  requisites  for  suc- 
cess in  this  line — money  and  business  ability — and  the 
manner  in  which  they  have  used  the  combination  to 
make  "hand  sapolio"  a  household  w^ord,  and,  it  is  fair 
to  presume,  a  financial  success,  is  too  well  known  to 
require  discussion. 

Such  a  good-will  is  carried  entirely  by  the  trade-mark 
and  trade-name.  The  original  owners  of  sapolio  might 
withdraw  or  die,  but  given  reasonable  business  ability 
in  their  successors,  the  business  would  go  on  utterly 
regardless  of  their  absence.  Or  the  trade-mark  and 
trade-name  might  be  sold  and  the  good-will  would 
promptly  follow  these  symbols  to  which  it  is  linked. 
In  such  a  case  its  value,  as  represented  by  these  names, 
can  be  estimated  with  the  same  accuracy  as  any  other 
property  asset  and  is  as  justly  included  in  capitalization. 

Between  the  extremes,  where  good-will  is  everything 


CAPITALIZATION PRESENT    VALUES.  2I3 

and  where  it  is  practically  nothing,  there  is  a  varying 
scale  of  changing  relations  and  it  is  apparent  that  the 
value  of  the  good-will  of  any  particular  business  must 
be  estimated  and  determined  by  the  nature  and  condi- 
tions of  that  business. 

It  should  always  be  borne  in  mind,  however,  that 
good-will  is  a  peculiar  and  often  unreliable  asset.  In 
event  of  the  final  liquidation  of  an  ordinary  commercial 
undertaking,  the  stock,  the  fixtures,  the  accounts  and 
the  other  material  assets  have  an  intrinsic  value  bear- 
ing at  least  some  approximation  to  the  value  at  which 
they  are  carried  on  the  books  of  the  concern.  The  good- 
will on  the  other  hand — save  in  case  of  a  trade-mark 
or  some  equivalent — has  no  value  that  can  be  realized 
but  scatters  and  is  lost. 

On  account  of  this  evanescent,  intangible  and  some- 
what uncertain  nature  of  good-will  in  the  ordinary  busi- 
ness, it  must  in  any  conservative  capitalization  be  reck- 
oned at  a  figure  much  below  its  apparent  or  producing 
value. 

The  capitalization  of  good-will  involves  no  peculiar 
difficulties.  In  economic  discussions  it  is  sometimes  con- 
tended that  good-will  should  not  be  included  in  capitali- 
zation at  all,  but  that  this  latter  should  be  based  on  the 
actual  material  values  of  the  business  alone  and  be  fixed 
at  the  amount  which  would  be  sufficient  to  replace 
these  material  values  if  they  were  destroyed.  On  this 
basis  the  total  capitalization  of  a  proprietary  business 
bringing  in  profits  of  perhaps  half  a  million  dollars  each 
year  might  be  a  mere  fraction  of  the  earnings  for  a 
single  year. 


214  FINANCING    AN    ENTERPRISE. 

In  practice,  however,  no  such  academic  considerations 
obtain,  and  good-will  as  a  rule,  though  not  tangible,  is 
regarded  as  an  asset  of  the  business  just  as  is  its  stock, 
its  bank  accounts,  its  office  equipment  or  its  realty,  and 
is  valued  in  any  capitalization  of  the  concern  with  as 
little  hesitation.  The  price  placed  upon  such  a  business 
when  it  is  to  be  sold  will,  as  a  matter  of  course,  include 
good-will,  and  so  also  will  the  capitalization  when  it  is 
incorporated. 

The  capitalization  of  good-will  is  almost  always  an 
important  feature  when  a  business  which  has  been  con- 
ducted under  the  partnership  form  is  converted  into  a 
corporation  with  the  old  partners  as  the  stockholders  of 
the  new  company.  Here,  if  proper  books  have  been 
kept,  the  capitalization  or  the  basis  of  the  capitalization 
for  the  new  company  has  been  practically  fixed  in  ad- 
vance. All  that  is  necessary  is  to  balance  the  partner- 
ship books,  take  the  present  worth  of  the  business  as 
shown  thereby,  add  to  this  present  worth  a  fair  valuation 
for  the  good-will  of  the  old  concern,  and  the  result  is 
in  most  cases  the  proper  capitalization.  The  corporation 
is  then  formed,  the  stock  of  the  new  company  is  divided 
among  the  partners  in  proportion  to  their  respective  in- 
terests in  the  old  business  and  as  far  as  the  capitalization 
and  its  distribution  are  concerned,  the  matter  is  at 
an  end. 

If  the  new  company  is  composed  of  the  old  partners 
and  no  new  members  are  to  be  admitted,  the  impor- 
tance of  including  the  good-will  or  of  valuing  it  ac- 
curately is  not  at  first  sight  always  apparent.  If  instead 
the    capitalization    were    based    on    the    actual    property 


CAPITALIZATION PRESENT    VALUES.  215 

values  and  the  stock  distributed  among  the  partners, 
each  would  have  his  proportionate  interest,  securing  to 
him  his  proper  status  in  the  new  company  and  his  proper 
proportion  of  its  profits,  and  this  would  seem  to  be  all 
sufficient. 

This  is  true  so  long  as  the  business  remains  in  the 
hands  of  the  old  partners  without  change.  It  is  then  a 
close  corporation,  as  discussed  in  a  preceding  chapter, 
in  which  the  capitalization  is  a  matter  of  small  moment, 
frequently  fixed  arbitrarily  at  some  convenient  figure 
and  serving  merely  as  a  means  of  apportioning  interests. 

If,  however,  there  is  any  probability,  either  imme- 
diate or  remote,  of  new  members  being  taken  in,  or  of 
stock  being  sold,  the  capitalization  of  the  business  at  its 
real  value  immediately  becomes  a  matter  of  importance. 
Even  when  such  changes  are  not  contemplated,  there  is 
always  the  possibility  that  one  of  the  original  partners 
may  die  or  become  financially  involved,  necessitating  the 
sale  or  other  disposition  of  his  stock,  when  the  amount 
of  capitalization  again  becomes  a  matter  of  importance. 
In  any  case,  if  stock  is  to  be  sold,  no  matter  whether 
from  intent  or  necessity,  a  deficient  or  under-capitaliza- 
tion  will  be  found  embarrassing  and  distinctly  disad- 
vantageous. 

A  reason  for  this  is  not  hard  to  find.  If  the  company 
were  over-capitalized  the  matter  could  easily  be  ex- 
plained to  the  purchaser  of  stock.  Indeed,  this  is  just 
what  he  is  anticipating,  and  he  would  very  cheerfully 
agree  that  the  price  of  the  stock  should  be  less  than  its 
face  value.  It  is,  however,  usually  very  difficult  to  con- 
vince him  that  the  company  has  been  under-capitalized. 


2l6  FINANCING    AN    ENTERPRISE. 

and  that  he  should  therefore  pay  more  than  its  face  value 
for  the  stock.  He  may  be  convinced,  perhaps,  that  such 
is  the  case,  but  as  a  rule,  even  thoug-h  the  under-capi- 
talization  is  patent,  it  will  be  found  that  the  prospective 
purchaser  of  stock  is  insistent  on  admission  on  the  basis 
of  actual  capitalization,  and  not  on  the  basis  of  the 
larger  values  claimed  by  the  partners  to  exist.  This 
being  true,  and  the  good-will  being  a  valuable  property 
belonging  to  the  business,  it  should  be  valued  and  in- 
cluded in  the  capitalization  with  the  same  care  as  is  given 
any  other  asset. 

In  a  business  of  long  standing  the  valuation  of  this 
good-will  is  not  usually  a  matter  of  difficulty.  The 
books  of  a  hardware  business  show,  we  will  say,  an 
actual  present  worth  in  material  values  of  $45,000.  The 
books  also  show  that  for  the  past  ten  years  the  average 
annual  profits,  after  making  all  deductions  for  fixed 
charges,  except  interest  on  the  investment,  have  aver- 
aged $10,000,  of  which  $4,000  has  been  withdrawn  by 
the  partners  on  salary  account  and  the  remainder  either 
divided   amongst   the   partners   or   left   in   the  business. 

Under  any  ordinary  circumstances  the  business  would 
be  expected  to  do  at  least  as  well  and  probably  better  in 
the  future.  If  the  salaries  in  the  incorporated  business 
were  fixed  at  $4,000  in  the  aggregate — the  same  sum 
as  before  drawn  under  the  partnership — the  average  an- 
nual gains  would  amount  to  $6,000  after  payment  of  all 
expenses  and  allowances.  This  $6,000  represents  the 
net  profits — the  producing  power  of  both  the  invested 
capital  and  the  good-will  of  the  business. 

From  these  net  profits,   six  per  cent,   on  the  invest- 


CAPITALIZATION PRESENT    VALUES.  217 

ment  amounting  to  $2,700  might  be  deducted,  leaving 
a  balance  of  $3,300  of  profits  to  be  credited  to  good-will. 
On  account  of  this  intangible  and  somewhat  illusive 
nature,  the  valuation  of  good-will  must  be  determined 
on  a  much  more  conservative  basis  than  would  obtain 
in  more  material  values.  In  the  case  under  discussion 
it  might  be  considered  that  good-will  should  produce 
twenty  per  cent,  annually,  and  on  this  basis  its  value 
would  be  $16,500.  As  a  matter  of  extra  precaution  this 
might  be  scaled  down  to  $15,000,  which,  added  to  the 
$45,000  of  material  values,  gives  a  total  capitalization 
for  the  entire  business  of  $60,000,  on  which  it  could 
pay  an  annual  dividend  of  ten  per  cent. 

In  ordinary  practice,  however,  no  such  separation  of 
earnings  would  usually  be  made,  certainly  not  in  a  com- 
paratively small  business,  such  as  that  under  discussion. 
Here  if  ten  per  cent,  was  considered  a  sufficient  annual 
dividend  for  the  business  to  pay,  its  capitalization  would 
be  fixed  on  that  basis.  As  the  net  profits  are  $6,000, 
this  by  a  very  simple  calculation  places  the  proper  capi- 
talization of  the  company  at  $60,000.  As  the  property 
values  of  the  business  are  $45,000,  this  amount  deducted 
from  the  total  capitalization  leaves  $15,000  to  represent 
the  value  of  the  good-will. 

In  the  capitalization  of  large  enterprises  the  common 
stock  is  frequently  based  directly  upon  and  represents 
the  good-will.  In  such  cases  preferred  stock  is  first  is- 
sued to  tlic  full  value  of  the  material  assets  of  the  under- 
taking. The  dividend  to  be  paid  on  this  preferred  stock 
is  then  deducted  from  the  total  net  earnings,  the  bal- 
ance left  representing  the  earnings  of  good-will.     From 


2l8  FINANCING    AN    ENTERPRISE. 

this  is  determined  the  value  of  the  good-will,  and  com- 
mon stock  is  then  issued  to  its  full  amount. 

For  instance,  if  the  total  estimated  net  earnings  of 
a  concern  to  be  capitalized  are  $3,000,000  per  annum 
and  the  property  values  involved  are  $20,000,000,  pre- 
ferred stock  is  issued  to  this  latter  amount.  If  a  seven 
per  cent,  preferred  dividend  is  to  be  paid,  its  amount — 
$1,400,000 — is  deducted  from  the  $3,000,000  of  earn- 
ings, leaving  $1,600,000  of  annual  profits  to  the  credit 
of  good-will. 

This  good-will  is  to  be  represented  by  common  stock, 
its  amount  being  fixed  by  the  dividend  rate  decided  upon. 
If  the  common  stock  is  to  have  an  eight  per  cent,  divi- 
dend, a  simple  calculation  will  show  that  the  $1,600,000 
of  profits  will  pay  eight  per  cent,  upon  $20,000,000, 
which  is  therefore  the  amount  of  common  stock  to  be 
issued.  The  total  capitalization  of  the  concern  will  then 
be  the  total  of  the  preferred  and  common  stocks,  or 
$40,000,000. 

For  instance,  in  the  capitalization  of  Sears.  Roebuck 
&  Co.,  the  mail  order  house  of  Chicago,  some  ten  years 
ago,  the  material  assets  turned  into  the  new-  company 
are  stated  roundly  to  have  had  a  net  value  of  not  less 
than  $10,000.00.  The  net  profits  for  the  preceding 
year,  as  stated  by  the  financial  agents  of  the  company, 
were  $2,868,061.31.  The  usual  custom  of  issuing 
preferred  stock  to  represent  the  tangible  assets  and 
common  stock  to  rejircsent  good-will  was  followed. 
This  gave  $10,000,000  of  preferred  stock  as  the  first 
item  of  the  new  capitalization,  to  which  is  assigned  a 
seven  per  cent,  cumulative  preferred  dividend,  requir- 


CAPITALIZATION PRESENT    VALUES.  2ig 

ing  for  its  payment  $700,000  aiiinially.  This  being 
deducted  from  the  annual  net  profits,  $2,168,061.31 
remains  representing  the  producing  power  of  the  good- 
will. Common  stock  to  the  value  of  $30,000,000  was 
then  added  to  the  capitalization  to  represent  this  good- 
will, which  is  therefore  capitalized  on  the  basis  of 
between  seven  and  eight  per  cent. 

The  total  capitalization  of  the  company,  which  it  is 
fair  to  presume  was  so  determined,  is  $40,000,000,  of 
which  $10,000,000  is  a  seven  per  cent,  cumulative  pre- 
ferred stock  representing  the  tangible  property  values, 
and  the  balance  of  $30,000,000  is  common  stock  repre- 
senting the  good-will  or  the  net  earning  power  of  the 
business  after  payment  of  the  seven  per  cent,  interest 
rate  on  the  material  values  involved.  The  fact  that 
the  company  has  paid  dividends  regularly  since  its 
incorporation,  that  on  January  2  of  this  year  its  com- 
mon stock  was  selling  at  184,  and  that  still  more 
recently  a  stock  dividend  of  $20,000,000  has  been  de- 
clared, based  upon  accumulated  earnings,  would  seem 
to  show  that  the  original  capitalization  was  justified. 

The  capitalization  of  the  United  States  Steel  Corpo- 
ration was  reached  in  much  the  same  way.  Preferred 
stock  and  bonds  were  issued  to  the  full  value  of  the 
material  assets.  Common  stock  was  then  issued  to  rep- 
resent the  good-will,  the  amount  of  this  common  stock 
being  such  that,  according  to  Wilgus  in  "A  Study  of  the 
United  States  Steel  Corporation,"  it  would  have  re- 
ceived about  seven  and  one-half  per  cent,  dividends  if 
the  estimated  profits  had  been  maintained. 

In  the  capitalization  of  most  of  these  large  combina- 


220  FINANCING    AN    ENTERPRISE. 

tions,  such  as  the  United  States  Steel  Corporation,  the 
problem  is  complicated  by  capitalization  of  not  only  the 
existing  good-will,  but  to  a  certain  extent  at  least  of  the 
anticipated  good-will.  That  is,  the  expectation  of  in- 
creased profits  is  represented  in  the  capitalization.  This 
is  justified  mainly  on  the  basis  of  the  economies  and 
resulting  greater  profits  incident  to  the  combination.  If 
such  economies  will  really  be  effected  and  the  resulting 
profits  are  capitalized  conservatively,  the  proceeding  is 
proper.  Frequently,  however,  as  is  shown  by  the  exist- 
ing conditions  of  many  of  the  larger  capitalizations,  the 
practice  was  carried  far  beyond  the  bounds  of  conser- 
vatism. 

At  times  the  capitalization  of  large  combinations  is 
carried  so  far  as  to  become  fraudulent.  If  we  are  to 
believe  the  allegations  of  its  receiver,  the  collapsed  as- 
phalt trust  which  occupied  the  popular  attention  some 
years  since,  was  a  capitalization  of  this  nature.  Here 
the  properties  combined  were  secured  by  the  promoters 
of  the  enterprise  under  option  or  contract  and  were  in 
many  cases  turned  into  the  trust  at  two  and  even  three 
times  the  prices  at  which  they  were  secured  by  the 
promoters.  The  fraud  in  this  case  was  upon  the  public, 
to  whom  the  highly  watered  stock  and  unsecured  bonds 
of  the  combination  were  sold  under  the  general  state- 
ment and  understanding  that  the  enterprise  was  capi- 
talized on  a  conservative  and  legitimate  basis.  The  dis- 
astrous failure  that  resulted  showed  that  it  was  not. 

In  the  ordinary  business  undertaking,  no  such  "sky- 
ward" capitalizations  obtain  as  in  the  large  combina- 
tions  of  the   country.     In   most  of  these   larger  enter- 


CAPITALIZATION PRESENT    VALUES.  221 

prises  there  are  reasons,  not  remotely  connected  with 
profit-taking,  for  capitaHzing  to  the  utmost  limit  of 
possible  dividend-paying  power.  These  do  not  exist 
in  the  ordinary  going  concern  and,  as  a  rule,  the  cap- 
italizations of  these  latter  arc  much  more  conservative. 
There  is  no  fixed  rule,  but  a  safe  capitalization  would 
ordinarily  demand  that  the  capital  stock  added  to  rep- 
resent good-will  should  produce  much  more  than  seven 
and  one-half  per  cent. 


CHAPTER  XXI. 

CAPITALIZATION  BASED  ON   PROFIT 
PROBABILITIES. 


Much  allied  to  the  capitalization  of  good-will  in 
a  going  concern  is  the  capitalization  of  profit  proba- 
bilities of  a  new  enterprise.  The  difference  between 
the  two  lies  in  the  somewhat  material  fact  that  good- 
will is  the  proved  earning  power  of  the  enterprise  as 
shown  by  its  past  history,  while  profit  probabilities  are 
merely  expectation.  The  one  can  be  capitalized  with 
considerable  accuracy.  The  other  can  only  be  ap- 
proximated and  is  apt  to  be  very  much  overestimated. 

In  enterprises  of  a  certain  class,  and  more  particu- 
larly in  those  of  a  speculative  nature,  this  capitaliza- 
tion of  profits  is  usual  and  expected,  and,  within 
bounds,  a  legitimate  proceeding. 

For  instance,  the  necessary  capitalization  of  the  coal 
property  discussed  in  a  preceding  chapter  is  $130,000. 
If,  after  reservation  each  year  of  a  sufficient  amount 
to  provide  for  maintenance,  depreciation  and  the  other 
fixed  charges,  including  a  sinking  fund  against  the 
final  working  out  of  the  property,  the' estimated  profits 
will  pay  a  dividend  of  fifteen  or  twenty  per  cent,  on 
the  invested  capital  of  $130,000,  the  capitalization  of 
the  enterprise  might  be  increased  up  to  even  twice  the 


222 


CAPITALIZATION PROFIT    PROBABILITIES,        223 

necessary  amount,  or  to  a  total  of  $260,000.  On  this 
the  enterprise  will,  if  successful  as  anticipated,  pay 
annual  dividends  of  seven  and  one-half  to  ten  per  cent. 
Such  a  dividend  should  give  the  stock  a  par  value  and 
bring  to  the  original  owners  a  "good-will"  profit  inci- 
dental to  the  successful  operations  of  the  mines,  of 
one  hundred  per  cent,  on  their  investment. 

If  the  capitalization  were  kept  at  the  original  figure 
of  $130,000,  the  dividends,  profits  being  the  same, 
would  be  far  above  anv  normal  rate  of  interest.  As  a 
consequence,  the  stock  would  sell  above  par  and  the 
owners  secure  their  good-will  profit  in  this  way.  To 
equal  the  good-will  profit  of  the  larger  capitalization, 
however,  this  increased  price  would  have  to  be  at  least 
200,  i.  e.,  $200  for  each  $100  share,  and  this  price 
would  not  ordinarily  be  reached  on  the  assumed  divi- 
dends of  fifteen  to  twenty  per  cent.  In  other  words,  a 
stock  paying  seven  and  one-half  per  cent,  dividends 
may,  under  proper  conditions,  sell  at  100  or  par,  but 
a  similar  stock  paying  fifteen  per  cent,  dividends  will 
not  usually  bring  200,  or  twice  par.  Hence,  if  the 
original  owners  contemplated  future  sales  of  stock 
and  had  any  real  basis  for  their  belief  in  the  earnings 
of  the  property,  the  increased  capitalization  would  be 
good  and  legitimate  business.  From  one  point  of 
view  the  stock  is  watered  to  the  extent  of  $130,000, 
but  such  watering  under  the  supposed  conditions  and 
with  a  properly  safeguarded  sinking  fund,  is  legiti- 
mate and  fully  justified.  If  the  dividends  are  paid,  it 
is  merely  a  capitalization  of  values  prior  to  or  in  an- 
ticipation of  their  development. 


224  FINANCING    AN    ENTERPRISE. 

Or  as  somewhat  differently  expressed,*  "If  an  en- 
terprise were  capitalized  at  such  a  figure,  say  $200,- 
000,  that  it  could  earn  and  pay  a  regular  annual  divi- 
dend of  six  per  cent.,  its  stock  should  sell  readily  at 
par,  or  100.  If  its  capitalization  were  reduced  one- 
half,  namely  $100,000,  so  that  its  regular  annual 
dividend  became  twelve  per  cent.,  the  stock  having 
twice  the  earning  power,  and  representing  the  same 
corporate  property,  should,  theoretically,  sell  at  twice 
par,  or  200.  As  a  matter  of  fact  it  would  do  nothing 
of  the  kind,  ordinarily  bringing  from  175  to  180  ac- 
cording to  circumstances,  and  showing  the  'cashing' 
value  of  the  smaller  capitalization  to  be  from  ten  to 
twelve  and  one-half  per  cent,  less  than  that  of  the 
larger.  That  is,  the  smaller  capitalization  would  in- 
volve a  loss  on  the  sale  of  the  entire  capital  stock  of 
from  $20,000  to  $25,000.  As  long  as  this  is  true, 
enterprises  will  be  capitalized  on  their  earning  ca- 
pacity rather  than  on  their  actual  immediate  value." 

In  any  such  case  of  advance  capitalization,  its  just- 
ness can  only  be  determined  by  development.  It  is 
in  the  first  place  founded  on  the  judgment  of  the 
parties  by  whom  it  is  fixed  and  the  event  only  can 
prove  or  disprove  the  correctness  of  their  judgment. 
If  the  enterprise  pays  fair  dividends  on  the  capitali- 
zation, they  are  justified.  If  it  does  not,  they  are 
shown  to  be  in  error  and  the  capitalization  is  an  over- 
capitalization. 

The  probabilities  of  profit  might  also  be  used  to 
increase  the  capitalization  of  the  dredging  contract, 
discussed  in  connection  with  the  coal  mine  proposition 

Conyngton  on  Corporate  Organization,  page  75. 


CAPITALIZATION PROFIT    PROBABILITIES.        225 

just  considered,  in  a  preceding  chapter.  In  this  enter- 
prise the  capitalization  on  tlie  basis  of  actual  values 
was  fixed  at  250,000,  of  which  $200,000  went  to  the 
men  financing  the  undertaking  and  $50,000  was  re- 
tained by  the  contractor  to  represent  his  interest  in 
the  undertaking.  If  the  matter  were  to  be  kept  en- 
tirely in  the  hands  of  the  original  parties,  there  would 
be  no  object  in  capitalizing  at  any  higher  figure. 
If,  however,  there  was  a  probability  that  stock  would 
be  sold,  or  in  any  event  if  the  undertaking  extended 
over  a  considerable  length  of  time,  capitalization  on 
the  basis  of  probable  profits  would  be  advisable  and 
would  usually  be  adopted.  The  prospects  for  profits 
in  such  an  undertaking  are  good  and  the  capitaliza- 
tion would  very  probably  be  put  at  double  the  pro- 
posed amount,  i.  e.,  $500,000.  On  this  basis  there  is 
a  clear  $250,000  of  capital  stock  awaiting  profits  for 
its  justification.  If  the  expected  profits  are  made,  the 
capitalization  is  conservative.  If  they  are  not  made, 
it  is  an  over-capitalization. 

In  capitalizing  enterprises  founded  upon  inventions, 
the  anticipation  of  earning  power  is  customary.  Any 
close  estimate  of  these  anticipated  profits  is,  of  course, 
impossible  and  in  such  cases  the  earning  power  of  the 
enterprise  as  a  whole  is  estimated  as  accurately  as  may 
be,  the  results  are  discounted  by  a  safe  margin  and 
the  capitalization  is  based  on  the  prospective  returns 
so  determined.  This  capitalization  must  be  suffi- 
ciently large  to  provide  for  all  operating,  sinking  and 
other  required  funds,  any  stock  reserves  that  may  be 
deemed  necessary  for   future  emergencies,   and  such 


226  FINANCING    AN    ENTERPRISE. 

additional  stock  for  the  inventor  and  his  associates  as 
will  fairly  represent  the  value  of  the  invention  or  of 
their  interest  therein.  All  these  requirements  will 
have  due  weight  in  determining  the  actual  amount  of 
the  capitalization. 

For  instance,  a  new  sewing  machine  is  invented.  It  has 
important  improvements  over  existing  machines,  and, 
as  conservatively  estimated,  after  due  provision  for  all 
operating  and  sinking  funds,  fixed  charges,  etc..  will 
pay  a  ten  per  cent,  dividend  upon  $750,000.  Some 
$250,000  in  cash  is  needed  for  the  operations  of  the 
business  and  perhaps  $25,000  in  cash  is  demanded  by 
the  inventor  in  addition  to  a  substantial  stock  interest. 

The  capitalization  of  such  an  enterprise  would  pro- 
bably be  in  the  hands  of  the  parties  who  are  to  finance 
it.  They  might  fix  the  capital  stock  at  $750,000. 
One-half,  two-thirds,  or  perhaps  more,  say  $550,000. 
will  be  given  for  the  money,  the  exact  amount  depend- 
ing upon  the  desirability  of  the  invention,  the  ease  of 
the  money  market,  and  the  persuasive  ability  of  the 
promoters.  The  inventor  would  then  be  given  his 
cash  and  his  stock,  this  latter  perhaps  amounting  to 
$75,000.  Any  agreed  reserve  of  stock,  say  $50,000, 
would  be  left  in  the  treasury,  and  the  remaining  stock. 
$75,000,  would  be  retained  by  the  promoters  if  the 
enterprise  is  financed  through  promoters. 

As  this  compensation  for  promoters  would  he  deem- 
ed rather  small,  they  would  probably  prefer  to  capital- 
ize at  $1,000,000,  increase  the  amount  given  for  the 
money  to,  say  $650,000,  increase  the  amount  for  the 
inventor,   if  he  could  not  be  persuaded  to  take  less. 


CAPITALIZATION PROFIT    PROBABILITIES.        227 

to  $100,000,  increase  the  reserve  to  $100,000  and  then 
retain  the  balance  of  $150,000  for  themselves.  The 
average  promoter  would  consider  this  a  very  moderate 
payment  for  promotion. 

The  capitalization  of  this  same  enterprise  might 
have  been  determined  from  a  different  standpoint. 
The  amount  of  stock  necessary  to  secure  the  needed 
cash  might  have  been  estimated,  the  amount  for  the 
inventor  settled  by  agreement,  any  reserve  decided 
upon,  and  the  prospective  returns  then  calculated  with 
careful  accuracy  to  determine  the  amount  of  addi- 
tional capital  the  enterprise  would  stand — this  addi- 
tional capital  inuring  to  the  promoters  as  their  profits. 

If  in  the  case  mentioned  the  inventor  had  friends 
to  whom  he  could  go  direct  and  secure  the  needed 
money,  thereby  eliminating  the  promoter,  the  capitali- 
zation would  probably  be  attained  in  much  the  same 
way,  but  with  a  different  disposition  of  the  proceeds. 
The  capitalization  would  perhaps  be  fixed  at  not  more 
than  $750,000.  Of  this  amount  the  men  with  money 
might  take  two-thirds,  set  aside  $100,000  to  $150,000 
for  reserve  and  turn  over  the  remainder  to  the  in- 
ventor. 

When  we  come  to  the  capitalization  of  enterprises 
founded  upon  or  including  franchises  among  their  as- 
sets, the  question  of  profit  probabilities  arises  in  a  dif- 
ferent form.  Such  enterprises  are  very  numerous  and 
the  proper  basis  of  capitalization  is  a  matter  of  much 
discussion — the  point  at  issue  being  whether  the  value 
of  the  franchise  is  properly  included  in  the  capitali- 
zation or  whether  this  latter  should  be  confined  strictly 
to  the  material  property  values  of  the  undertaking. 


228  FINANCING    AN    ENTERPRISE. 

The  difficulty  in  this  case  seems  to  arise  from  the 
practice  that  has  prevailed  in  this  country  of  giving 
these  franchises  as  a  free  gift;  usually  as  a  donation 
for  the  benefit  of  the  parties  to  the  enterprise,  or  as 
an  inducement  to  secure  the  construction  of  some 
quasi-public  work  or  utility,  or  as  a  tribute  to  the 
influence  of  money  or  the  power  of  politicians.  Some- 
times they  are  stolen  with  more  or  less  directness,  but 
generally  they  are  obtained  by  means  not  so  liable  to 
lead  to  subsequent  disagreeable  consequences. 

As  to  the  ethics  of  the  question  involved,  nothing 
need  be  said — it  is  beyond  the  province  of  this  volume. 
As  to  the  practical  side,  it  would  seem  just  as  legiti- 
mate to  capitalize  a  valuable  franchise  as  to  capitalize 
any  other  property  pertaining  to  the  enterprise.  The 
undertaking  is  to  be  capitalized  as  a  whole  and  the 
franchise  is  an  integral,  inseparable  and  usually  a 
most   valuable   and   essential   part   of   its   possessions. 

For  example,  the  Philadelphia  authorities  a  decade 
or  so  ago  granted  a  franchise — broad  in  extent  and 
liberal  in  its  provisions — to  the  Union  Traction  Co. 
for  the  use  of  the  city  streets  for  trolley  purposes. 
Immediately  thereafter  John  W'anamaker,  who  had 
opposed  the  grant,  offered  $2,000,000  for  the  fran- 
chise as  it  stood.  The  offer  was  refused.  Undoubt- 
edly Wanamaker  made  his  offer  as  an  object  les- 
son to  the  people  to  show  them  how  they  were 
being  plundered,  but  the  fact  remains  that  the 
franchise  was  obtained  without  payment  of  any 
kind  to  the  city  and  that  an  actual  offer  of  $2,000,000 
made  for  this  same  franchise  by  a  responsible  party 
was  refused. 


CAPITALIZATION PROFIT    PROBABILITIES.        229 

The  fact  that  the  franchise  was  practically  stolen 
cuts  no  figure  from  the  present  point  of  view.  It  was 
a  most  reprehensible  proceeding,  reflecting  alike  upon 
the  people  and  the  politicians  of  the  Quaker  City.  It 
probably  led  up  to  the  later  and  very  emphatic  refusal 
of  the  people  to  permit  somewhat  similar  and  equally 
iniquitous  franchises  to  be  granted  the  Philadelphia 
Gas  Combine.  All  this  is,  however,  but  an  incident 
entirely  apart  from  the  question  of  capitalization. 
The  franchise  had  an  actual  tangible  cash  value  of  at 
least  $2,000,000.  The  company  owning  it,  no  matter 
by  what  means  it  was  acquired,  was  entitled  to  include 
this  value  in  the  corporate  capitalization. 

In  many  cases  franchises  are  obtained  by  proper 
means,  by  more  or  less  adequate  payments  or  under 
agreements  at  least  partially  protective  of  the  public 
interests.  In  other  cases  the  public  freely  donate  to 
the  favored  individuals  these  franchises  for  their  per- 
sonal advantage.  The  owners  then,  having  secured 
their  franchise,  whether  by  gift  or  purchase,  are  by 
law  and  custom  entitled  to  regard  it  and  capitalize  it 
as  they  would  any  other  private  property. 

For  instance,  a  little  group  of  financiers  secure  with- 
out cost  to  them  a  thirty-year  franchise,  permitting 
them  to  use  the  streets  of  their  home  town  for  the 
laying  of  gas  pipes  and  the  distribution  and  sale  of 
gas.  By  a  simple  engineering  estimate  they  find  that 
their  plant,  including  the  laying  of  pipes  and  all  ex- 
penses up  to  the  point  of  beginning  business,  will  cost 
approximately  $450,000.  For  operating  capital  and 
as  a  margin  of  safety  they  allow  $50,000  more,  mak- 
ing the  necessary  capitalization  of  the  company  $500,- 


230  FINANCING   AN    ENTERPRISE. 

000.  They  find  by  estimate  and  comparison  of  results 
secured  elsewhere  that  after  deducting  all  mainte- 
nance, operating  and  incidental  expenses  they  can  pay 
a  fifteen  per  cent,  annual  dividend,  amounting  to 
$75,000,  on  this  necessary  capitalization.  Taking  all 
the  business  risks  and  contingencies  into  considera- 
tion, they  are  perhaps  entitled  to  six  per  cent,  on  their 
investment.  A  sinking  fund  of  say  $20,000  per  an- 
num is  also  to  be  provided.  After  deducting  the  total 
of  these  two,  $25,000  is  left  as  the  annual  earning 
power  of  their  franchise.  On  a  six  per  cent,  basis, 
this  would  fix  the  value  of  their  franchise  at  over 
$400,000.  In  order  to  be  on  the  safe  side  and  to 
avoid  attracting  too  much  attention  to  dividends,  the 
parties  in  control  would  probably  capitalize  at  $1,000,- 
000,  put  in  the  $500,000  in  cash  necessary  for  their 
installation  and  take  out  $2  in  stock  for  each  $1  of 
cash  invested.  On  this  stock  they  would  receive  an 
annual  dividend  of  five  and  one-half  per  cent.,  or  its 
equivalent. 

Or  they  might,  as  is  the  more  common  practice, 
capitalize  at  $500,000,  this  representing  approxi- 
mately the  value  of  the  franchise,  and  issue  six  per 
cent,  bonds  to  a  similar  amount  to  cover  the  material 
values  involved.  These  bonds  would  then  be  issued 
for  the  $500,000  of  required  cash  and  the  stock  be 
divided  among  the  parties  in  control  as  may  have  been 
agreed. 

Or,  as  the  full  earning  power  of  the  plant  would  not 
be  reached  for  some  years,  the  owners  might  capital- 
ize at  $500,000,  issue  this  for  cash,  and  then  as  profits 


CAPITALIZATION PROFIT    PROBABILITIES.        23 1 

increased,  increase  their  capitalization  correspond- 
ingly, issuing  this  additional  stock  pro  rata  to  their 
stockholders  as  a  stock  dividend  until  the  full  capital- 
ization of  $1,000,000  was  reached. 

As  between  the  parties  to  the  investment,  the  capi- 
talization, on  any  of  these  suppositions,  is  certainly 
fair  and  proper.  They  have  the  earning  power  to 
justify  the  capitalization  and  the  fact  that  a  large  por- 
tion of  this  was  donated  by  the  people,  or  was  stolen 
from  the  people,  does  not  affect  the  propriety  of  the 
capitalization  in  the  least — from  a  business  standpoint. 
If  a  man  stole  a  factory  and  transferred  it  to  a  corpo- 
ration in  which  he  was  interested,  the  factory  should 
show  in  the  capitalization  just  the  same — provided 
there  were  no  flaws  in  the  corporate  title. 

Neither  when  such  stock  is  sold  is  there  in  the  ab- 
sence of  misrepresentation  any  wrong  to  the  pur- 
chaser. He  is  offered  stock  at  a  certain  price,  based 
on  certain  property  and  franchises,  and  paying  a  reg- 
ular and  known  dividend.  He  must  exercise  the  usual 
prerogatives  of  the  purchaser  in  his  investigation  and 
if  he  thinks  the  stock  is  worth  the  money,  must  pur- 
cliase  on  the  strength  of  his  own  judgment. 

Of  course,  all  this  does  not  in  any  way  apply  to 
the  very  excessive  over-capitalizations  that  are  so  com- 
mon— to  the  enterprises  which  are  capitalized  and 
perhaps  re-capitalized  and  this  capitalization  increased 
to  a  figure  far  beyond  any  possible  carrying  powers  of 
the  enterprise.  Even  then  the  practice  is  mainly  ob- 
jectionable because  this  highly  watered  stock  is  un- 
loaded on  the  public  on  the  either  expressed  or  under- 


232  FINANCING   AN    ENTERPRISE. 

stood  representation  that  the  capitalization  is  reason- 
able and  one  on  which  fair  dividends  can  be  paid. 
Such  a  proceeding  is  a  form  of  plundering  the  public 
even  more  direct  than  the  theft  of  franchises,  but  the 
excessive  capitalization  is  merely  an  accessory  feature 
no  more  harmful  in  itself  than  is  the  dark  lantern  or 
"jimmy"  of  the  professional  burglar. 


CHAPTER  XXII. 

CAPITALIZATION   BASED  ON   PROFIT 
POSSIBILITIES. 


The  distinction  between  capitalization  of  profit 
probabilities  and  profit  possibilities  is  expressed  by  the 
terms.  Profit  probabilities  are  usually  capable  of  ap- 
proximation. Profit  possibilities  are  not.  The  grounds 
of  expectation  are  too  uncertain,  too  remote,  or  too 
unknown.  Any  estimate  of  profit  possibilities  is  there- 
fore of  necessity  much  in  the  nature  of  a  guess. 

All  the  more  speculative  enterprises,  such  as  many 
mines,  new  processes,  inventions  outside  the  realm 
of  experience,  and  all  cases  where  desperate  financial 
risks  are  balanced  against  compensating  profits  gained 
in  case  of  success,  belong  to  this  class.  The  real  value 
of  these  enterprises  cannot  be  ascertained  short  of 
actual  development,  and  the  possibilities  furnish  the 
only  basis  for  capitalization. 

As  the  actual  values  of  such  enterprises  cannot  be 
ascertained,  their  capitalizations  are  merely  the  ex- 
pression of  the  hopes  of  the  promoters,  and  are  there- 
fore naturally  large.  They  cannot,  however,  be  term- 
ed over-capitalizations  in  the  ordinary  sense  of  the 
word.  If  successful,  the  enterprise  will  probably  sus- 
tain its  capitalization.  If  not,  the  amount  is  a  matter 
of  small  moment. 

The  practice  of  capitalizing  possibilities  is  hardly 

233 


234  FINANCING   AN    ENTERPRISE. 

open  to  serious  objection  as  long  as  the  basis  employed 
is  well  understood.  If,  however,  promoters  or  others 
selling  the  stock  of  such  enterprises  misrepresent  the 
conditions,  directly  or  indirectly,  for  the  sake  of  mak- 
ing sales,  the  general  proceeding  becomes  highly  ob- 
jectionable. It  is  then  nothing  less  than  fraud,  but 
the  fraud  lies  in  the  false  representations. 

In  speculative  mining  enterprises  we  find  these  "ad- 
vance" capitalizations  best  exemplified.  Here  the 
possibilities  are  large  and  elastic,  the  imaginative 
powers  of  the  promoters  have  free  sway,  and  as  a 
consequence  startling  capitalizations  are  common. 
When  such  an  enterprise  is  to  be  ofifered  to  the  public, 
it  is  first  capitalized  up  to  the  limit  of  reasonable 
possibilities,  as  much  more  capitalization  is  thrown  in 
as  the  promoters'  very  elastic  consciences  will  allow, 
and  the  offering  is  ready.  The  stock  is  then  offered 
at  the  highest  figure  the  public  can  be  induced  to  pay — 
which  is  usually  a  few  cents  on  the  dollar — as  much 
stock  is  sold  as  possible,  and  purchasers  and  promoters 
then  await  the  results  of  their  "gamble."  The  pro- 
moters, having  already  taken  their  first  profits  from 
the  sales  of  stock,  are,  however,  in  the  better  waiting 
position.  In  the  majority  of  cases  no  other  profits 
are  realized. 

A  glance  at  the  financial  papers  will  furnish  many 
illustrations  of  these  capitalizations.  The  names  for 
obvious  reasons  are  changed,  but  otherwise  the  quota- 
tions are  accurate.  "Lightning  Mountain"  mines  are 
advertised,  "Now  working  in  rich  ore,"  with  a  capi- 
talization of  $1,000,000  all   in  the  treasury.     Money 


CAPITALIZATION PROFIT    POSSIBILITIES.  235 

is  needed  for  operating  and  development,  and  this 
stock  is  offered  for  a  "limited  period"  at  one  cent  for 
each  $1.00  share.  That  is,  if  the  whole  capitalization 
were  sold  at  the  offered  rate,  the  company  would  have 
$10,000  in  its  treasury.  This  amount,  it  would  there- 
fore seem  reasonable  to  assume,  is  the  present  cash 
valuation  placed  by  the  owners  on  the  property. 
Without  any  investigation,  it  would  be  very  safe  to 
say  that  the  "properties"  consist  of  more  or  less  un- 
developed prospects  and  that  the  valuation  of  $10,000 
is  quite  a  liberal  one.  Just  how  the  company  can  be 
carrying  on  active  operations  when  the  stock  is  "all 
in  the  treasury"  is  not  explained. 

In  the  same  issue  almost  jostling  the  advertisement 
commented  on,  appears  another  mining  proposition — 
"Keystone  Consolidated,"  capitalization  $1,500,000. 
This  is  to  operate  a  developed  mine  and  therefore 
shares — "par  value  $1.00" — are  higher,  selling  at 
three  cents  each  "for  a  short  time  only."  Another 
"ad"  but  a  few  columns  removed  again  fixes  the 
capitalization  of  the  "Lucky  Strike"  at  $1,500,000, 
selling  at  two  cents  for  each  $1.00  share,  and  an- 
nounces that  "one  big  vein  of  $90.00  gold  ore  has 
been  reached,"  etc. 

Another  states  the  conditions  very  clearly  in  its 
advertisement.  In  this  case  stock  is  selling  at  five 
cents  per  share.  The  announcement  explains :  "The 
capitalization  of  this  company  is  moderate  —  only 
1,000,000  shares  of  the  par  value  of  $1.00  each.  At 
the  rate  of  five  cents  a  share,  this  means  that  it  is  like 
a  capitalization  of  only  $50,000,  if  all  the  stock  were 


236  FINANCING    AN    ENTERPRISE. 

sold.  Every  $25,000  net  profit  would  mean  about 
fifty  per  cent,  on  your  investment.  Every  $50,000 
would  mean  100  per  cent.  Think  of  that!  And  what 
is  $50,000  net  profit  in  a  prolific  .Nevada  camp?" 

A  still  more  interesting  proposition  is  that  of  a 
prospecting  company  which  owns  nothing  at  all,  but 
thinks  something  can  be  discovered  among  the  Nevada 
hills  and  has  capitalized  this  possibility  at  $1,000,000. 
This  is  "all  full-paid  and  non-assessable,"  though  how 
the  stock  has  been  made  full-paid  is  not  explained — 
perhaps  it  was  issued  in  payment  for  the  possibilities. 
Half  this  stock  is  offered  for  sale  in  1,000-share  blocks 
— shares  $1.00 — at  $20  a  block,  or  two  cents  a  share. 

In  all  ventures  of  this  kind  the  astonishing  induce- 
ments possible  with  millions  of  capitalization  at  com- 
mand are  relied  upon  in  the  appeal  to  the  public.  It 
is  generally  recognized  clearly  that  such  capitaliza- 
tions are  artificial  and  no  possible  measure  of  the  value 
of  the  enterprise.  Notwithstanding  this,  the  public 
can  not  escape  from  the  impression  that  capitalization 
does  bear  some  relation  to  the  real  value  of  the  prop- 
erty and  that  a  share  of  stock  of  the  par  value  of 
$1.00,  purchased  for  two  cents,  cannot  fail  to  give  a 
large  profit  somewhere,  immediate  or  otherwise,  and 
that  the  transaction,  though  not  quite  similar,  is  allied 
to  the  purchase  of  dollar  greenbacks  at  ninety-eight 
cents  off. 

In  justice  to  the  mining  proposition,  however,  it 
must  be  said  that  in  many  cases  the  properties  repre- 
sented may  be  worth  considerably  more  than  would 
be  indicated  by  the  selling  price  of  stock.     Those  in 


CAPITALIZATION — PROFIT    POSSIBILITIES.  237 

control  may  be  and  often  are  willing  to  offer  their 
first  stock  at  a  figure  very  far  below  its  real  value — 
or  its  value  after  this  first  money  is  secured.  They 
do  this  in  order  to  get  the  capital  needed  to  start 
things  going  and  make  the  remainder  of  the  stock, 
as  well  as  that  already  sold,  very  much  more  valuable. 

Probably  in  the  majority  of  mining  enterprises  of 
this  nature  the  capitalization  bears  no  possible  relation 
— save  perhaps  of  exaggeration — to  the  value  of  the 
properties  present  or  future,  but  is  merely  an  arbi- 
trary amount  which  the  promoters  think  sufficiently 
large  for  their  purposes.  It  is  also  to  be  feared  that 
in  many  cases  the  possible  profits  responsible  for  these 
airy  capitalizations  are  to  be  drawn  from  the  pockets 
of  unlucky  investors  rather  than  from  the  treasure 
houses  of  the  earth. 

In  other  classes  of  speculative  enterprises  large  cap- 
italizations, though  better  justified  by  the  possibilities, 
are  of  necessity  fixed  in  the  same  loose  manner.  In 
these  enterprises,  generally  inventions,  the  value  is 
absolutely  impossible  of  determination  and  the  capi- 
talization is  therefore  fixed  at  the  amount  the  promo- 
ters deem  desirable  or  think  the  enterprise  can  carry. 
Then  when  the  public  is  appealed  to,  the  price  of  stock 
is  fixed  at  such  a  figure  as  will  make  sales  possible, 
and  is  thereafter  adjusted  and  readjusted  as  circum- 
stances dictate. 

Wireless  telegraphy  affords  an  excellent  illustration 
of  this  kind  of  an  enterprise.  No  real  commercial 
value  of  the  wireless  had  been  shown  when  the  capi- 
talization of  the  original  Marconi  Wireless  Telegraph 


238  FINANCING    AN    ENTERPRISE. 

Company  was  fixed  at  $6,000,000.  No  demonstration 
of  its  practical  application  sufficient  to  justify  any 
such  capitalization  had  been  made  when  a  sub- 
company  for  America  was  formed  with  a  capital  stock 
of  $6,500,000,  or  the  sub-company  for  Canada  with  a 
capital  of  $5,000,000.  The  capital  stock  of  the  Amer- 
ican company  was  reduced  a  few  years  ago  to  a  moiety 
of  its  original  figure.  Since  then  it  has  again  been 
increased,  the  new  stock  being  sold  to  provide  operat- 
ing capital.  This  seems  to  indicate  either  an  original 
over-capitalization  or  mismanagement,  or  otherwise  an 
entire  miscalculation  of  the  conditions  and  require- 
ments. 

There  was  no  uncertainty  as  to  the  value  of  the  gen- 
eral results  aimed  at  in  wireless  telegraphy.  The  basis 
of  comparison  with  which  it  might  be  measured  was  at 
hand  and  when  a  reasonably  complete  success  is 
reached,  the  proper  capitalizations  of  the  wireless 
companies  will  be  easily  determined.  The  only  ques- 
tion was — and  still  is  to  some  extent — the  measure 
of  success  that  could  be  attained. 

When  we  come  to  an  entirely  new  discovery  where 
this  "basis  of  comparison"  does  not  exist,  the  problem 
is  much  more  difficult.  It  then  passes  from  the  con- 
dition of  a  problem  capable  of  present  solution  into 
the  domain  of  conjecture. 

Many  of  the  important  discoveries  of  the  past 
twenty-five  years  belong  to  this  class.  The  most  con- 
spicuous example  is  perhaps  the  telephone.  The  ex- 
ploitation of  liquid  air  is  possil)ly  one  of  the  most 
characteristic. 

In  this  latter  case  the  product  was  an  entirely  new 


CAPITALIZATION PROFIT    POSSIBILITIES.  239 

one.  It  was  surmised  with  much  probability  that  its 
use  would  be  varied  and  extended.  This  was,  how- 
ever, entirely  surmise.  The  substance  had  not  been 
produced  in  sufficient  quantities  and  for  a  sufficient 
length  of  time  to  demonstrate  its  quahties,  its  appli- 
cations and  the  possibility  of  its  commerical  use.  It 
might  be  used  as  a  refrigerating  element,  or  it  might 
be  used  as  a  source  of  power.  It  might  be  used  as  a 
"pulverizer"  to  make  meat  tender,  or  as  a  promoter 
of  combustion  to  render  materials  ordinarily  non- 
inflammable  suitable  for  fuel.  Many  other  ingenious 
applications  were  perceived  and  heralded  and  the 
"passing  of  the  ice  wagon"  and  of  many  other  varied 
and  even  antagonistic  articles  and  industries  was 
plainly  to  be  seen — according  to  the  interesting  state- 
ments of  the  interested  parties. 

All  this  was  mere  speculation,  however.  The  arti- 
cle, its  method  of  manufacture  and  its  applications 
were  new.  There  was  no  "basis  of  comparison"  upon 
which  a  reasonably  proper  capitalization  could  be 
based.  Accordingly  the  most  prominent  of  the  com- 
panies organized  to  exploit  the  new  industry  was  cap- 
italized at  the  modest  figure  of  $7,500,000.  Easy 
dividends  on  this  amount  were  figured  out  on  the  basis 
of  different  applications  of  the  material,  handsome 
offices  were  rented,  interesting  and  striking  demon- 
strations were  given  and  the  public  was  invited  to 
invest  at  a  price  of  $5  for  each  $100  share. 

Whether  this  company  was  organized  in  good  faith 
to  develop  and  operate  a  legitimate  industry  cannot 
be  said.  Certainly  it  very  shortly  developed  into  some- 
thing that  looked  strikingly  like  a  stock  jobbing  enter- 


240  FINANCING    AN    ENTERPRISE. 

prise  run  for  the  benefit  of  certain  of  its  promoters. 
Every  energy  was  devoted  to  the  sale  of  stock,  ex- 
travagant and  unfounded  claims  were  made  as  to  facts 
and  figures,  and  the  whole  thing  shortly  fell  into  dis- 
repute and  seems  to  have  entirely  disappeared. 

Here  the  capitalization  was  simply  a  matter  of  arbi- 
trary decision.  In  the  hands  of  more  extravagant 
promoters,  it  might  have  been  increased  a  few  mil- 
lions— in  the  hands  of  more  conservative  men  it  might 
have  been  reduced  as  much.  Neither  could  be  said 
to  approximate  the  correct  capitalization.  It  was 
purely  a  matter  of  guessing. 

Under  conservative  and  proper  management,  the 
company  referred  to  would  probably  have  been  capi- 
talized at  from,  $100,000  to  $500,000.  A  substantial 
interest  would  have  been  assigned  to  the  inventor,  a 
similar  liberal  interest  would  have  been  allotted  to 
the  men  who  put  in  the  necessary  development  money, 
a  safe  reserve  would  have  been  kept  in  the  treasury 
and  the  company  so  constituted  would  have  devoted 
its  energies  to  the  commercial  application  of  liquid  air 
until  the  value  of  the  discovery  itself  and  of  the  par- 
ticular patents  under  which  they  were  operating  had 
been  demonstrated  to  at  least  a  reasonable  degree. 
The  value  of  the  whole  enterprise  could  then  have 
been  approximated  and  the  company  have  been  re-cap- 
italized on  the  basis  of  this  value. 

As  the  matter  was  conducted  it  was  either  a  stock 
jobbing  scheme,  or  exhibited  a  very  premature  and 
improper  desire  to  "take  profits"  before  they  were 
earned. 


CHAPTER  XXIII. 
EXCESSIVE  CAPITALIZATION, 


Excessive  capitalization  may  be  allowable  and  pos- 
sibly not  improper  for  the  more  speculative  enter- 
prises. For  the  usual  business  corporation  it  is  an 
unmitigated  evil. 

An  excessive  capitalization  renders  the  payment  of 
dividends  difficult  if  not  impossible.  Under  improper 
management  they  are  paid  notwithstanding  the  condi- 
tions, and  are  therefore  either  paid  at  the  expense  of 
the  future  of  the  enterprise,  or  even  worse  than  this, 
from  improper  or  illegal  sources.  In  any  of  these 
cases  the  prestige  and  reputation  of  the  enterprise  are 
seriously  damaged,  its  financial  conduct  is  difficult  and 
its  final  success  seriously  endangered.  As  a  matter  of 
fact,  many  failures  of  really  meritorious  undertakings 
are  directly  due  to  over-capitalization. 

Also  if  stock  in  an  over-capitalized  enterprise  is  of- 
fered the  public  without  some  explanation,  intimation 
or  understanding  of  the  true  conditions,  the  proposi- 
tion is  more  or  less  in  the  nature  of  a  fraud. 

Beyond  all  this,  over-capitalization  has  a  tendency 
to  create  and  maintain  an  inflated  and  fictitious  atmos- 
phere. The  enterprise  is  on  an  irresponsible  basis  and 
is  too  apt  to  be  conducted  on  extravagant  lines.  Of 
what  use  are  the  ordinary  business  economies  when 

241 


242  FINANCING   AN    ENTERPRISE. 

millions  are  being  created  by  the  stroke  of  a  pen,  or 
even  less  laboriously  by  the  easy  operations  of  a  print- 
ing press?  Without  regard  to  the  real  value  of  the 
enterprise,  a  million  dollar  corporation  is  naturally 
more  handsomely  housed  and  equipped  than  is  a 
modest  company  with  a  capitalization  of  but  $10,000 
or  $100,000.  Also  its  officers  are  more  numerous, 
expect  larger  salaries  and  demand  more  generous 
treatment,  and  the  same  scale  of  lavishness  obtains 
from  top  to  bottom  of  the  entire  enterprise. 

The  whole  thing  is  wrong  and  artificial  and  from 
the  substantial  fee  of  the  attorney  who  brings  the 
over-valued  company  into  existence,  to  the  residuary 
retainer  of  the  attorney  who  attends  to  its  decent 
dissolution — if  enough  is  left  to  make  this  last  sad 
rite  worth  while — the  over-capitalized  company  is 
plundered  and  mismanaged. 

Just  what  constitutes  over-capitalization  is  too  ex- 
tended a  subject  for  discussion  here.  Unquestionably 
any  enterprise  is  entitled  to  capitalize  up  to  its  actual 
value  as  a  going  concern  and  as  much  further  as  is 
necessary  to  provide  for  legitimate  present  and  future 
needs.  It  may  be  entitled  to  capitalize  profit  proba- 
bilities. It  may  be  compelled  to  capitalize  profit  pos- 
sibilities. Over-capitalization  may  then  perhaps  be 
defined  as  any  capitalization  in  excess  of  the  proper 
needs  or  necessities  of  the  enterprise. 

Over-capitalization  of  ordinary  business  enterprises 
usually  results  from  one  of  four  causes : 
(i)     Fraudulent   intent. 
(2)      The  method  of  promotion. 


EXCESSIVE    CAPITALIZATION.  243 

(3)  Over-sanguine  estimates  of  value. 

(4)  The  avarice  of  owners  or  promoters. 
Fraudulent  over-capitalization  borders  very  closel}' 

on,  or  perhaps  includes,  that  vicious  form  of  financial 
activity  in  which  a  capitalization  is  founded  upon  some 
non-existent  or  valueless  enterprise,  and  where  the  real 
purpose  of  the  undertaking  is  the  sale  of  its  worthless 
stock.  In  such  cases  the  property  represented  by  the 
usually  generous  capitalization  is  of  little  or  no  value, 
or  is  not  owned  by  the  promoters,  or  perhaps  exists 
only  in  their  imagination. 

An  exceptionally  good  example  of  this  kind  of  cap- 
italization is  afforded  by  a  corporation  known  as  the 
"Royal  Diamond  Company,"  which  some  years  since 
conducted  its  operations  with  much  artistic  ability  and 
success  at  No.  lo  Wall  Street,  until  stopped  by  an 
unappreciative  police. 

This  company  was  supposed  to  own  newly  dis- 
covered diamond  fields  in  South  America  rivalling  the 
Kimberly.  Stock  was  being  sold  to  secure  money  for 
the  alleged  development  of  these  fields.  The  glittering 
claims  and  the  attractive  nature  of  the  inducements 
were  all  that  the  subject  demanded  or  that  the  imagin- 
ation could  desire.  The  undertaking  was  very  suc- 
cessful in  securing  money. 

Here  not  only  was  the  foundation  of  the  enterprise 
itself — that  is.  tlie  diamond  mines — absolutely  non- 
existent, but  so  also  were  most  of  the  accessories. 
Whole  boards  of  directors,  composed  of  dukes  and 
earls  and  other  dignitaries  helpful  to  the  business, 
together   with   banking   references   in   dififerent   parts 


244  FINANCING    AN    ENTERPRISE. 

of  the  earth,  and  maps,  statements,  diagrams,  specifi- 
cations, and  other  details  necessary  or  desirable  for 
the  promoters'  purposes,  were  constructed  out  of  the 
whole  cloth.  In  fact,  the  only  real  things  about  the 
unusually  brazen  swindle,  outside  the  office  furniture 
and  other  operating  equipment,  were  the  promoters, 
their  dupes  and  the  money  received  by  the  former  from 
the  latter. 

The  only  question  in  such  a  case  is  whether  any 
capitalization  based  solely  upon  the  "airy  fabric  of  a 
dream"  can  be  termed  an  over-capitalization. 

The  ordinary  fraudulent  over-capitalization  is,  how- 
ever, founded  on  something  more  tangible  if  not  more 
valuable  than  the  ethereal  assets  of  the  Royal  Diamond 
Company.  When  properties  may  be  secured  at  so 
little  expense  or  perhaps  at  no  expense  at  all,  it  does 
seem  reckless  to  found  an  enterprise  entirely  on  noth- 
ing, the  practice  having  the  double  disadvantage  of 
being  easy  of  detection  and  difficult  of  explanation. 
Even  a  good  man  might  possibly  over-capitalize  an 
existing  property,  but  it  would  be  difficult  to  convince 
the  most  confiding  magistrate  that  the  capitalization 
of  no  property  at  all  was  merely  a  mistaken  judgment 
of  values. 

At  any  rate,  fraudulent  over-capitalizations  are 
usually  based  upon  actual  properties  located  in  some 
far  away  place  where  investigation  is  difficult  and,  as 
far  as  the  smaller  investors  are  concerned,  actually 
impossible.  In  these  cases  the  properties  are  deliber- 
ately over-capitalized  without  any  regard  whatever  for 
present  or  future  values,  merely  as  a  convenient  and 


EXCESSIVE    CAPITALIZATION.  245 

impressive  basis  for  a  swindle.  Many  of  these  under- 
takings have  been  signally  successful  in  obtaining 
money  for  their  promoters.  In  some  few  cases  they 
have  landed  their  promoters  in  the  penitentiary. 

Enterprises  over-capitalized  from  the  second  cause, 
i.  e.,  the  method  of  promotion,  are  sometimes  difficult 
of  classification.  That  is,  on  occasion  it  is  hard  to 
say  whether  such  an  enterprise  should  be  listed  as  a 
fraud  or  merely  as  an  overstrained  legitimate  enter- 
prise. Cases  of  this  kind  are  best  exemplified  by  the 
numerous  and  glaringly  advertised  propositions  of  the 
"get-rich-quick"  variety,  which  contribute  with  such 
liberality  to  the  support  of  financial  advertising  medi- 
ums, to  the  maintenance  of  showy  offices  and  offi- 
cers and  to  the  payment  of  commissions  and  profits, 
that  there  is  very  little  left  for  the  operations  of  the 
"underlying"  enterprise.  As  a  rule,  these  undertak- 
ings are  founded  upon  propositions  of  more  or  less 
merit.  The  promoters  have  no  objection  to  merit  if 
it  can  be  secured  at  small  expense,  but  this  founda- 
tion enterprise  is  of  necessity  so  over-capitalized  to 
meet  the  numerous  "preliminary"  demands  upon  it, 
that  there  is  no  possible  chance  short  of  an  industrial 
miracle  that  the  overweighted  enterprise  will  ever  pay 
dividends.  Frequently  it  does  not  even  survive  to  the 
operative  period. 

Of  this  class  mining  schemes  are  the  least,  and 
industrial  schemes  the  most  objectionable.  Occasion- 
ally a  highly  capitalized  and  widely  advertised  mining 
scheme  does  by  some  lucky  strike  "pay  out" — the  in- 
dustrials of  the  kind  rarely,  if  ever.     After  the  pro- 


246  FINANCING    AN    ENTERPRISE. 

motion  period  and  its  profits  are  past,  they  almost 
invariably  "fold  their  tents  like  the  Arabs  and  as 
silently  steal  away."  Unfortnnately  this  is  not  the 
only  steal  involved. 

Over-capitalization  due  to  the  third  cause — over- 
sanguine  estimates  of  value — is  of  frequent  occur- 
rence. 

Inventors  are  specially  prone  to  over-capitalizations 
from  this  cause.  Naturally  and  of  necessity  they  are 
of  somewhat  eccentric  mental  action,  as,  unless  their 
minds  did  move  in  new  and  unusual  channels,  they 
would  hardly  invent.  This  being  measurably  true, 
it  is  no  wonder  that  the  inventor  who,  after  months 
and  perhaps  even  years  of  effort,  expense,  experi- 
ment and  disappointment,  has  finally  perfected  his 
design — who  sees  the  creation  of  his  own  lirriin  in 
brass  and  steel  actually  operating  and  doing  what  he 
intended  it  to  do  and  possibly  doing  it  well — should 
feel  elated  and  be  thoroughly  convinced  that  his  ma- 
chine is  the  one  above  all  others,  and  that  no  capitali- 
zation, no  matter  what  its  amount,  will  reach  the 
actual  value  of  his  device. 

The  writer  recalls  one  instance  where  an  inventor 
deemed  it  advisable  to  organize  a  conipanv  to  handle 
one  of  his  inventions.  At  the  time  it  consisted  of  a 
model  half  finished,  unpatented  and  \vh(jlly  untried. 
Nothing  daunted  by  these  conditions,  the  inventor 
capitalized  his  company  at  lialf  a  million  dollars,  one- 
half  of  which  was  issued  to  himself  in  part  payment 
for  the  rights  to  his  invention.  In  addition,  the  com- 
pany was  compelled  to  issue  bonds  to  the  amount  of 


EXCESSIVE    CAPITALIZATION.  247 

$50,000  in  further  payment  for  the  said  rights.  Still 
further  the  company  was  required  to  refund  all  the 
expenditures,  real  and  imaginary,  incurred  by  the  in- 
ventor in  the  course  of  his  previous  work  on  the  in- 
vention. The  company  was  also  forced  to  agree  to 
a  somewhat  excessive  royalty  to  the  inventor  on  all 
machines  manufactured  under  any  patents  that  might 
be  obtained,  and  finally  the  inventor  caused  himself 
to  be  employed  as  general  manager  of  the  concern 
for  a  term  of  years  at  a  salary  in  accord  with  his  esti- 
mation of  his  services. 

The  associates  of  the  inventor  who  had  advanced 
a  large  sum  of  money  with  reckless  disregard  of  the 
usual  precautions,  received  stock  at  the  rate  of  two 
shares  of  stock — par  value  $ioo  each — for  every  $ioo 
of  cash  invested.  The  company  is  now  at  a  standstill, 
pending  the  discovery  by  the  inventor  of  more  indi- 
viduals of  weak  mentality  awaiting  separation  from 
their  money. 

Promoters  are  also  prone  to  excessive  capitaliza- 
tion. Here  the  genial  optimism,  characteristic  of  and 
perhaps  necessary  to  the  make-up  of  a  successful  mem- 
ber of  the  profession,  leads  him  to  see  "millions"  in 
it  when  these  values  are  not  perceptible  to  the  ordi- 
nary vision.  Therefore,  with  the  most  cheerful  in- 
difference to  the  usual  standards,  he  capitalizes  on  the 
basis  of  his  airy  belief  in  the  possibilities  of  the 
scheme. 

The  most  common  instance  of  this  is  when  an  en- 
terprise is  placed  in  a  promoter's  hands  for  financing 
under  an  agreement  that  the  owner  is  to  receive  a 


248  FINANCING    AN    ENTERPRISE. 

fixed  price,  or  a  percentage  of  the  financed  enterprise, 
and  that  all  the  promoter  can  make  or  save  beyond 
this  belongs  to  him.  Under  such  an  arrangement 
any  capitalization  that  the  enterprise  could  carry  and 
still  reach  its  intended  financial  destination,  would 
hardly  be  open  to  criticism  except  from  the  standpoint 
of  ethics.  Promoters  expect  to  make  large  profits  and 
when  successful  do  make  them.  In  the  cases  under 
discussion,  however,  it  is  not  uncommon  to  find  the 
promoters  deliberately  deciding  upon  such  an  extrava- 
gant increase  of  price  or  of  capitalization  as  would 
indeed  make  the  angels  weep  if  interested  in  the 
financing  of  the  enterprise.  The  load  imposed  is  then 
so  far  beyond  any  reasonable  profit  or  dividend- 
paying  possibility,  and  so  far  beyond  reason,  that  the 
whole  undertaking  is  brought  to  disaster. 

The  experience  of  Mr.  Charles  Sclnval).  of  Steel 
Trust  fame,  with  a  picture  dealer  of  Milan,  while  ntU 
a  case  of  over-capitalization  but  merely  one  of  exces- 
sive over-pricing,  brings  out  so  clearly  the  frame  of 
mind  and  procedure  characteristic  of  promoters  that 
it  may  well  be  mentioned.  In  the  instance  referred 
to,  a  painting  by  Gainsborough  had  been  placed  in 
the  dealer's  hands  for  sale  at  a  fixed  price  to  the 
owners,  the  dealer's  profit  lying  in  an  advance  on 
this  basic  price.  The  owners'  price  was  $3,500.  The 
dealer,  with  a  modest  but  becoming  sense  of  the  value 
of  his  own  services,  placed  the  asking  price  at  $25,- 
000,  and  offered  it  to  Mr.  Schwab  at  this  figure.  The 
latter  was  interested  and  finally  agreed  to  purchase  at 
the  figure   named.      This  point   had   no  sooner   been 


EXCESSIVE    CAPITALIZATION.  249 

reached  than  the  appalHng  conviction  flashed  across 
the  dealer's  mind  that  he  had  hopelessly  undervalued 
his  services.  He  could  not  raise  his  price  to  Mr. 
Schwab,  but  he  could  and  did  appeal  to  the  owners  of 
the  picture  to  so  reduce  their  price  to  him  that  he 
might  make  a  living  wage  out  of  the  sale.  This, 
though  ignorant  of  the  dealer's  price  to  Mr.  Schwab, 
the  owners  refused  to  do  and  it  seemed  as  if  the 
unhappy  tradesman  must  perforce  be  content  with  the 
meagre  profit  to  which  he  had  so  carelessly  committed 
himself.  The  negotiations  had,  liowever,  leaked  out 
in  the  meantime  and  a  rival  dealer  of  more  petty  am- 
bition ofifered  to  sell  the  same  picture  to  the  prospec- 
tive purchaser  for  $10,000.  This  naturally  roused 
Mr.  Schwab's  suspicion  and  he  declined  to  have  any- 
thing more  to  do  with  the  matter.  The  first  dealer 
then,  concluding  that  a  wagon-load  of  loaves  was 
better  than  no  bread,  brought  suit  for  specific  per- 
formance of  the  contract,  but,  having  either  stated 
or  given  Mr.  Schwab  to  understand  that  the  price 
asked  was  that  fixed  by  the  owners,  lost  his  case  on 
the  ground  of  misrepresentation. 

In  the  case  cited  the  sale,  it  must  be  admitted,  was 
very  nearly  carried  to  a  successful  conclusion,  and  in 
that  event  the  price  would,  from  a  cold  business  stand- 
point, have  been  justified.  In  the  case  of  promoters 
who  are  utterly  unable  to  stagger  under  the  excessive 
capitalizations  they  impose  upon  themselves  there  is, 
however,  no  justification  and  the  practice  is  difficult 
to  explain.  It  is  not  indulged  in  by  the  better  class 
of  promoters,  but  it  is  a  mistake  made  by  many  a 


250  FINANCING    AN    ENTERPRISE. 

promoter  who  ought  to  know  better.     It  seems  to  be 
a  form  of  avaricious  mania. 

In  the  reading  books  of  the  old-time  schools  the 
pupils  were  regaled  with  a  detailed  account — inter- 
esting, if  true — of  the  method  by  which  the  natives 
in  some  parts  of  Africa  catch  monkeys.  A  hole  is 
first  made  in  a  gourd  just  large  enough  to  easily  ad- 
mit a  monkey's  paw.  Through  this  hole  the  contents 
of  the  gourd  are  removed  and  replaced  by  large  and 
angular  nuts.  The  prepared  gourds  are  then  securely 
affixed  to  the  branches  of  some  tree  favored  by  the 
particular  brand  of  monkeys  required  at  the  time. 

The  natives  withdraw  and  the  monkeys  quickly 
flock  to  the  scene  of  action  to  determine  whether  the 
new  philanthropy  is  a  Carnegie  library  or  a  Hearst 
free-lunch  wagon.  As  soon  as  the  real  nature  of  the 
benefaction  is  ascertained  each  monkey  occupying  the 
proper  respective  coign  of  vantage  obligingly  inserts 
his  paw  through  the  hole  in  his  gourd,  seizes  a  handful 
of  the  nuts  and  tries  to  withdraw  from  the  game.  As 
the  hole  is  of  the  exact  size  to  admit  the  unloaded 
paw,  this  naturally  cannot  be  done.  The  avaricious 
monkey,  however,  refuses  to  drop  his  prize,  remains 
self-caught  and  is  so  held  until  the  natives  return  and 
consign  the  foolish  monkey,  along  with  other  captured 
compatriots,  to  an  organ  grinding  academy. 

The  illustration  afforded  by  this  narrative  is  too 
good  to  permit  us  to  question  its  veracity.  It  is  ex- 
actly what  promoters  do  when  they  load  up  so  heavily 
and  seek  to  grasp  so  much  that  they  are  able  to  do 
nothing.     The  promoter  is  worthy  of  his  hire,   and 


EXCESSIVE    CAPITALIZATION.  25  I 

its  amount  should  be  liberal,  but  to  grasp  at  so  much 
that  he  loses  all  is  not  only  an  injury  to  himself  but 
a  direct  and  unjustifiable  wrong  to  his  client. 

The  subject  of  compensation  of  promoters  is  dis- 
cussed in  a  later  chapter  and  will  not  be  taken  up  here. 
For  the  present  purpose  it  will  suffice  to  say  that  to 
double  the  capitalization  of  an  enterprise  in  order  that 
the  added  half  may  go  to  the  promoters  is  not  un- 
common, and  is  often  greatly  exceeded.  If  this  were 
the  compensation  of  the  man  who  puts  in  the  money 
it  would  be  another  question,  but  when  it  is  merely 
for  the  parties  who  find  the  parties  who  put  in  the 
money,  it  seems  excessive.  More  than  that,  the  men 
with  money  ordinarily  will  not  have  it.  Nothing  is 
gained  and  usually  all  is  lost. 

In  one  case  within  the  writer's  immediate  knowledge, 
a  very  practical  and  valuable  little  invention  had  been 
perfected  and  was  ready  to  be  placed  on  the  market. 
The  inventor  offered  it  to  some  promoter  friends  for 
$25,000  of  the  stock  of  the  company  they  were  to 
organize.  Had  these  friends  been  reasonable,  they 
would  have  capitalized  it  at  a  figure  somewhat  com- 
mensurable with  the  amount  to  be  paid  the  inventor, 
and  the  invention  would  have  attained  the  success  it 
merited.  But  the  promoters  promptly  capitalized  the 
enterprise  on  the  very  unwarranted  basis  of  $100,000. 
$25,000  of  this  was  to  go  to  the  inventor;  $25,000  was 
to  be  sold  for  working  capital;  the  $50,000  of  stock 
remaining  was  to  come  to  themselves.  The  enter- 
prise naturally  came  to  grief,  not  from  any  lack  of 
merit,  but  just  simply  because  the  over-capitalized 
offering  was  not  attractive  to  men  with  money. 


252  FINANCING    AN    ENTERPRISE. 

These  men  with  money  are  not  unwilhng  to  be 
found  when  promoters  have  anything  really  good  to 
offer,  but  they  do  object  to  having  the  largest  part  of 
the  enterprise  turned  over  to  the  promoters  to  pay 
them  for  the  discovery.  They  are  selfish  enough  to 
want  some  fair  proportion  for  themselves. 


PART  V.     PRESENTATION  OF  AN 
ENTERPRISE. 


CHAPTER  XXIV. 
MANNER  AND  MATTER  OFPRESENTATION, 


In  the  presentation  of  an  enterprise  difficult  ques- 
tions arise.  Theoretically,  a  plain,  honest  statement 
of  the  facts  and  conditions,  free  from  color  or  preju- 
dice of  any  kind,  and  coupled  with  a  reasonable  offer, 
ought  to  get  the  money  needed  for  a  good  enterprise. 
Occasionally  it  will,  but  in  ninety-nine  cases  out  of 
a  hundred  it  will  not.  Such  a  presentation  lacks  at- 
tractiveness. Capital  is  timid  and  must  be  reassured. 
The  merits  of  the  enterprise  must  be  emphasized,  the 
weak  points  fortified,  the  risks  minimized,  and  the 
various  possibilities  pleasingly  indicated.  If  this  is 
not  done  capital  usually  betakes  itself  off  to  some 
other  enterprise,  perhaps  not  so  good,  but  more  at- 
tractively presented. 

But  this  presentation,  while  it  is  expected  to  be 
favorable  and  will  usually  be  enthusiastic,  must  be 
kept  within  proper  bounds.  Intentional  misrepresen- 
tations or  material  concealments  are,  of  course,  out- 
side the  present  discussion.     Without  any  wrongful 

253 


254  FINANCING   AN    ENTERPRISE. 

intent,  however,  good  points  may  be  so  emphasized 
as  to  verge  on  false  representation,  and  weak  points 
and  deficiencies  may  be  so  minimized  as  to  practically 
result  in  concealment.  The  line  of  demarcation  is 
sometimes  difficult  to  draw  and  there  is  occasionally 
a  decided  difference  of  opinion  as  to  the  exact  point 
at  which  legitimate  statement  merges  into  misrepre- 
sentation. 

There  is,  however,  a  wide  range  of  open  country 
before  this  "debatable  land"  is  reached,  and  just  how 
far  it  may  be  traveled  with  propriety  must  rest  with 
the  individual.  He  is  certainly  justified  in  empha- 
sizing the  good  points  of  his  enterprise  and  in  setting 
them  off  to  the  best  advantage.  He  is  also  justified 
in  showing  just  why  weak  points  are  not  seriously 
injurious  and  how  they  may  be  avoided  or  overcome. 
He  is  on  safe  ground  just  so  long  as  his  statements 
are  honest  statements;  so  long  as  his  facts  are  real 
facts — stated  favorably,  perhaps,  but  fairly  and  not  so 
ingeniously  perverted  or  distorted  as  to  lead  to  false 
conclusions. 

If,  however,  the  hopes  or  expectations  of  the  owner 
are  stated — as  is  not  infrequently  the  case — in  such 
a  way  as  to  give  the  impression  that  they  are  accom- 
plished facts ;  if  serious  defects  or  absolute  deficiencies 
are  suppressed,  avoided,  or  improperly  explained 
away;  if  existing  conditions  are  presented  in  such  a 
way  as  to  almost  unavoidably  lead  the  prospective 
investor  to  false  conclusions,  the  bounds  have  been 
passed,  and  a  moral,  and  sometimes  a  legal  liability 
is  incurred. 

Also  it  should  be  borne  in  mind  by  the  promoter 


MANNER  AND  MATTER  OF  PRESENTATION.         255 

that  any  improper  representations  of  the  kind  are 
always  remembered,  may  come  up  later  to  the  em- 
barrassment and  injury  of  the  party  responsible  for 
them,  and,  finally,  it  should  be  recognized  that  with 
a  fairly  good  deal  they  are  unnecessary.  The  height 
of  artistic  presentation  is  to  take  the  facts  just 
as  they  are,  and,  without  suppression,  material  eva- 
sion or  subterfuge  of  any  kind,  state  them  so  clearly 
and  strongly  and  in  such  connection  with  the  possi- 
bilities and  the  beliefs  of  the  promoter — stated  as 
possibilities  and  beliefs — as  to  carry  conviction  to  the 
investing  mind  not  only  that  the  enterprise  is  a  good 
one,  but  that  it  is  in  capable  hands  as  well. 

When  the  actual  proposition  is  reached — that  critical 
feature  of  a  presentation  to  which  everything  else 
leads  up — there  is  but  little  play  for  the  imagination. 
There  is  no  painting  of  the  lily  here.  Hard,  cold 
statements  of  fact  are  in  order,  so  clear  and  so  com- 
plete that  there  is  no  room  for  misunderstanding  or 
for  subsequent  disclaimer. 

This  proposition  is  the  specific  statement  upon  which 
money  is  to  be  secured.  In  framing  it,  good  common 
sense,  judgment  and  business  ability  can  be  employed 
to  advantage.  Its  details  will  be  governed  by  the 
conditions  and  the  necessities  of  the  particular  under- 
taking. If  the  enterprise  is  not  strong  in  itself,  it 
must  make  up  for  its  deficiencies  by  the  liberality  of 
the  proposition.  If  the  times  are  hard  and  money 
scarce,  the  terms  must  again  be  liberal.  If  the  owners 
of  the  enterprise  are  driven  by  their  personal  neces- 
sities, they  must  meet  the  capitalistic  demands,  and 
the  proposition  will  then  be  generous  indeed. 


256  FINANCING    AN    ENTERPRISE. 

The  method  of  presentation  also  has  a  direct  bear- 
ing on  the  details  of  the  proposition.  In  the  earlier 
history  of  an  enterprise  funds  for  its  purposes  are 
almost  always  sought  from  one  individual  or  from 
a  limited  number  of  persons.  Under  such  conditions 
the  parties  approached  easily  may  and  usually  do  com- 
bine and  are  then  apt  to  require  that  the  proposition 
be  shaped  to  meet  their  views.  Not  uncommonly 
these  views  involve  a  very  disproportionate  interest 
in  the  enterprise  for  themselves. 

Just  how  much  the  owners  of  the  enterprise  must 
concede  to  this  demand  is,  as  already  intimated,  a 
matter  of  conditions.  If  the  owners  are  financially 
independent,  or  are  good  enough  "bluffers"  to  give 
the  impression  of  financial  independence ;  or  if  they 
are  sufficiently  resourceful  to  find  other  channels 
through  which  money  may  be  secured,  and,  perhaps, 
work  the  one  against  the  other;  or  if  they  are  of 
sufficient  persuasive  power  to  soften  the  capitalistic 
heart,  or  of  such  ability  and  persistence  as  to  be  able 
to  work  the  enterprise  out  themselves  if  they  must, 
the  men  with  money  may  be  brought  to  fairly  reason- 
able terms.  If  otherwise,  the  owners  are  in  the  hands 
of  the  Philistines  and  must  do  the  best  they  can — 
which  is  not  usually  very  well. 

It  is  to  be  noted,  however,  that  the  possibilities 
of  a  new  enterprise,  and  the  idea  of  coming  in  on 
the  ground  floor  are  not  lacking  in  attraction  for  the 
smaller  investor.  Then,  if  the  men  of  large  means 
are  too  difficult  or  too  grasping,  it  is  frequently  possi- 
ble, even  in  the  earlier  stages  of  an  enterprise,  to  ap- 
peal successfully  to  those  of  less  means,  each  one  of 


MANNER  AND  MATTER  OF  PRESENTATION.         257 

these  putting  in  a  small  amount  and  their  total  sub- 
scriptions aggregating  the  larger  amount  needed.  In 
such  case  the  owner  of  the  enterprise  may  arrange 
the  details  of  the  proposition  to  suit  himself.  The 
smaller  investor  may  then  accept  or  reject  the  offer, 
but  cannot  hope  to  modify  its  terms.  He  is  not  of 
sufficient  importance  to  even  attempt  to  dictate. 

The  first  proposition  in  any  case  will  usually  and 
naturally  be  along  the  lines  preferred  by  the  owner, 
or  be  one  that  he  thinks  will  secure  the  money.  If 
the  enterprise  is  a  good  one  and  the  owner's  proposi- 
tion is  reasonably  fair,  he  may  be  able  to  carry  it 
through.  It  is,  however,  rarely  that  an  enterprise 
is  financed  on  an  inflexible  proposition.  Changes 
desired  by  the  investors  may  be  unobjectionable  or 
perhaps  entirely  proper,  and  in  either  event  will  natu- 
rally be  conceded.  In  perhaps  the  majority  of  cases 
they  are  at  least  partly  reasonable,  and  concessions 
must  then  be  made  on  both  sides. 

At  times  when  the  conditions  are  difficult  or  per- 
haps not  fully  known,  the  simplest  way  of  arriving 
at  a  proposition  that  will  secure  money  is  by  the 
experimental  method.  The  owners  arrange  a  tenta- 
tive offer  that  seems  fair  to  them,  with  possibly  a 
trading  margin  added.  They  then  try  this  on  a  "dog" 
— or  otherwise  a  capitalist.  The  justness  of  the  pro- 
position is  judged  by  the  results.  The  capitalist  is 
apt  to  express  himself  freely,  and,  with  due  allowance 
for  peculiarities  of  the  particular  capitalist,  a  very  fair 
idea  of  the  merits  of  the  trial  proposition  may  thus 
be  obtained  and  the  proposition  may  then  be  modified 
in  the  light  of  this  knowledge. 


258  FINANCING   AN    ENTERPRISE. 

All  the  more  important  features  which  affect  it 
should  appear  in  the  proposition,  though  in  what  de- 
tail will  depend  upon  the  particular  conditions.  If 
the  owners  of  the  enterprise  are  to  give  their  time  to 
its  operation,  a  demand  for  reasonable  salaries  or 
stock  compensation  is  but  fair  and  would  properly 
appear  in  the  proposition.  The  amount  of  these  sala- 
ries might,  however,  be  left  for  later  settlement.  Or 
if  minority  interests  are  to  exist  the  proposition  might 
require  reasonable  protection  for  them,  the  method  by 
which  it  is  to  be  attained  being  left  for  future  agree- 
ment. If  a  specified  management  is  to  control,  proper 
stipulations  should  be  made  in  the  proposition  and 
might  very  well  provide  the  method  for  its  mainte- 
nance. If  royalties  are  to  be  paid,  they  should  be 
so  secured  by  provisions  for  minimum  output  and 
specific  dates  of  payment  as  to  really  protect  the  owner, 
and  stipulations  for  such  protection  would  usually 
appear  in  the  proposition. 

When  options  on  properties  or  the  properties  them- 
selves form  the  basis  of  an  enterprise,  peculiar  condi- 
tions are  frequently  introduced  into  the  proposition. 
These  arise  from  the  fact  that  the  properties  or  op- 
tions are  usually  owned  or  controlled  by  the  active 
parties  or  "promoters"  who  are  financing  the  under- 
taking and  who  organize  corporations  for  the  express 
purpose  of  taking  over  or  purchasing  these  properties. 

If  the  properties  are  turned  in  to  the  corporation  at 
the  actual  purchase  or  option  price  to  the  promoters, 
the  transaction  is  legitimate  and  unobjectionable. 
Usually,  however,  the  promoters  turn  these  properties 
in  to  the  corporation  at  prices  higher  than  those  called 


MANNER  AND  MATTER  OF  PRESENTATION.         259 

for  by  their  options,  or  if  the  properties  are  owned 
by  them,  at  prices  higher  than  their  own  purchase 
price,  the  difference  representing  a  profit  to  the  pro- 
moters. Even  here  there  is  nothing  to  be  said  if  the 
facts  as  to  the  promoters'  profits  are  known  to  all 
the  parties  concerned.  When,  however,  the  promo- 
ters, in  order  to  avoid  criticism  and  objection,  attempt 
to  conceal  the  fact  of  their  profits,  the  procedure  be- 
comes an  infraction  of  the  law  and  is  liable  to  be 
overturned  at  the  suit  of  any  party  immediately  inter- 
ested. 

These  conditions,  which  frequently  arise,  are  not 
generally  understood  and  the  complications  that  may 
ensue  are  so  serious  that  the  following  somewhat 
lengthy  quotations  from  "Conyngton  on  Corporate 
Organization"  (page  2^2  et  seq.)  can  hardly  be  deem- 
ed out  of  place. 

"For  the  purposes  of  the  present  consideration  the 
promoter  is  one  who  concerns  himself  in  the  financing 
and  organization  of  a  corporation  with  a  view  of 
realizing  special  profits.  In  a  large  proportion,  if  not 
the  majority  of  such  cases,  the  promoter  has  brought 
about  the  organization  of  the  corporation  for  the  ex- 
press purpose  of  securing  these  special  profits.  There 
is  no  intrinsic  iniquity  or  injustice  in  so  doing.  The 
only  question  is  as  to  the  propriety  and  legality  of  his 
arrangements  for  their  collection.     *     *     * 

"The  relation  of  the  promoter  both  to  the  corpora- 
tion and  to  those  associated  with  him  in  its  organiza- 
tion is  one  of  trust.  He  is  guiding  the  affairs  of  the 
incipient  corporation  and  is  supposed  to  be  safeguard- 
ing its  interests  as  he  would  his  own.     *     *     * 


26o  FINANCING   AN    ENTERPRISE. 

"This  doctrine  is  too  clearly  established  to  be  ques- 
tioned. The  confidential  relations  of  the  promoter 
being  admitted,  it  follows  then  that  while  he  may  with 
entire  propriety  and  legality  profit  by  his  connection 
with  the  corporation,  such  profit  must  be  made  and 
taken  in  such  ways  as  are  compatible  with  these  exist- 
ing confidential  relations.     *     *     * 

"The  usual  mistake  of  the  promoter  is  in  dealing 
with  the  corporation  as  he  would  with  a  stranger. 
Unreasonable  or  even  large  profits  are  difficult  of  at- 
tainment if  the  party  from  whom  they  are  to  be  drawn 
is  informed  as  to  the  facts,  and  for  this  reason  the  pro- 
moter wishing  to  sell  property  to  the  corporation 
usually  conceals,  or  worse  still,  misrepresents  its  real 
cost.  If  the  property  were  actually  owned  by  the 
promoter  and  had  been  so  owned  before  the  organiza- 
tion of  the  corporation  was  undertaken,  the  status 
would  be  different.  Then,  under  proper  conditions, 
there  would  be  no  compulsion  upon  him  to  reveal  the 
cost  of  the  property  and  he  might  sell  it  to  the  corpo- 
ration at  any  agreed  price,  and,  in  the  absence  of 
misrepresentation,  without  fear  of  legal  consequences. 

"Usually,  however,  the  promoter  does  not  own  the 
property  taken  over  by  the  corporation,  but  either 
holds  it  under  option  or  is  acting  in  the  interests  of 
the  real  owner,  who  pays  him  a  percentage  of  the  price 
secured,  or  allows  him  to  offer  it  to  the  corporation 
at  an  advanced  price,  protecting  the  promoter  in  all 
excess  over  the  real  price  to  the  owner.  When  the 
promoter  occupies  this  position,  unless  with  the  full 
knowledge  of  his  associates  and  the  corporation,  he 
is  in  conflict  with  the  law,  for  it  has  been  laid  down 


MANNER  AND  MATTER  OF  PRESENTATION.        261 

clearly  and  unmistakably  that  a  promoter  must  not 
make  any  secret  profit  out  of  his  corporation,  or  out 
of  those  associated  with  himself  in  the  formation  of 
the  corporation.     *     *     * 

"From  the  cases  cited  and  the  additional  cases  given 
hereafter,  it  is  clear  that  any  special  profits  made  by 
the  promoter  are  illegal  unless  made  with  the  full 
knowledge  of  all  the  others  interested  or  with  the 
consent  of  an  independent  and  fully  informed  board 
of  directors,  or  with  disclosure  of  the  conditions  to 
intending  stockholders.  Suit  for  redress  might  be 
brought  at  any  subsequent  time  by  the  corporation, 
or,  under  some  circumstances,  by  the  stockholders  who 
have  immediately  contributed  to  the  promoter's  im- 
proper profits  by  the  purchase  of  stock  on  its  first  issue, 
or  of  treasury  stock  thereafter.     *     *     * 

"The  laws  are  very  clear  in  their  denunciation  of  the 
promoter's  secret  profits.  They  are  hardly  less  ex- 
plicit in  their  recognition  of  the  promoter's  right  to 
profits  if  secured  and  taken  under  proper  conditions. 
In  I  Morawetz  on  Private  Corporations,  §  293,  it  is 
said: 

"  'However,  there  is  no  rule  of  law  prohibiting  a 
person  from  forming  a  corporation  for  the  purpose  of 
selling  property  to  it  and  making  a  profit  from  the  sale. 
The  law  merely  requires  that  such  a  transaction  be 
entirely  open  and  free  from  deception  upon  the  com- 
pany and  upon  those  who  become  members.'  " 

From  these  quotations  it  seems  very  clear  that  the 
promoter  is  well  within  his  rights  when  he  organizes 
a  corporation  to  purchase  his  own  property,  provided 
that  such  purchase  by  the  corporation  is  directed  by 


262  FINANCING  AN    ENTERPRISE. 

an  independent  board  capable  of  impartial  judgment 
as  to  the  value  of  the  property  and  the  advisability  of 
the  purchase  by  the  corporation,  and  is  made  with  full 
knowledge  of  the  fact  that  the  property  in  question 
belongs  to  the  promoter.  In  such  cases  the  promoter 
having  purchased  or  otherwise  acquired  such  property 
before  the  inception  of  the  corporation,  was  not  and 
could  not  then  in  any  way  have  been  acting  as  the 
agent  or  trustee  of  the  corporation.  He  may  have 
acquired  such  property  at  any  price  or  in  any  way, 
and,  when  later  the  corporation  is  organized,  he  is  at 
liberty  to  offer  this  property  to  the  corporation  at  any 
advanced  or  different  price  he  may  choose,  without 
divulging  the  profits  to  be  made  thereby.  The  one 
essential  is  that  such  offering  shall  be  absolutely  with- 
out misrepresentation.  If  he  represents  that  the  prop- 
erty is  owned  by  him  when  only  held  by  option,  or 
that  it  is  turned  in  to  the  corporation  at  the  cost  to 
him  when  he  is  really  making  a  profit,  such  misrepre- 
sentations are,  under  the  circumstances,  material  and 
render  the  promoter  liable  for  the  secret  profits  so 
secured.  Without  such  misrepresentation,  however, 
he  may  make  what  profit  he  will. 

When  secret  profits  are  to  be  made  several  different 
methods  are  employed  to  effect  the  necessary  transfers 
without  revealing  the  promoter's  profits.  These  are 
sometimes  allowable,  but  are  in  most  cases  of  doubtful 
propriety  and  perhaps  of  doubtful  legality  as  well. 

When  the  owner  of  the  properties  is  willing  to  as- 
sist in  the  concealment  of  profits,  he  will  sometimes 
give  options  to  the  promoters  at  the  advanced  figure 
fixed  by  them,  agreeing  at  the  same  time  to  "protect" 


MANNER  AND  MATTER  OF  PRESENTATION.         263 

the  promoters — that  is,  to  pay  over  •  to  them  all 
amounts  received  by  him  in  excess  of  his  private  ask- 
ing price.  This  is  the  simplest  method  of  arranging 
the  matter.  Then  as  soon  as  the  owner  receives  his 
money  he  turns  the  excess  price  over  to  the  promoters 
and  the  transaction  is  closed. 

Another  plan  is  for  the  owner  to  give  two  options 
to  the  parties,  one  at  the  real  price,  the  other  at  the 
advanced  price  at  which  the  property  is  to  go  into 
the  enterprise.  The  higher  priced  option  is  exhibited 
and  apparently  acted  upon.  When  the  properties  are 
to  be  transferred,  the  deeds  or  assignments  are  escrow- 
ed with  some  trust  company  or  other  reliable  trustee, 
under  an  agreement  that  upon  receipt  of  the  advanced 
or  fictitious  price,  the  deeds  or  assignments  are  to  be 
turned  over  to  the  parties  making  the  payment,  the 
owner  is  to  be  paid  his  real  price,  and  the  option  par- 
ties are  to  be  paid  the  balance  which  represents  their 
profits  in  the  transaction.  This  is  obviously  merely  a 
variation  of  the  preceding  plan,  but  is  frequently  pre- 
ferred. 

If  the  owner  of  the  property  is  not  willing  to  become 
a  party  to  the  concealment,  a  plan  sometimes  pursued 
is  to  take  the  option  out  in  the  name  of  a  "dummy" 
— that  is,  some  friend  or  associate  of  the  promoters, 
who  appears  in  the  matter  for  some  nominal  payment 
or  perhaps  purely  for  accommodation.  This  dummy, 
after  the  option  is  made  out  to  him,  gives  in  turn  an 
option  to  the  promoters  at  a  higher  price,  and  this 
latter  option  is  the  one  that  is  shown.  The  actual 
transfer  of  the  property  is  then  again  handled  through 
a  trustee,  who  makes  the  delivery  and  necessary  pay- 
ments. 


264  FINANCING   AN    ENTERPRISE. 

This  is  obviously  a  more  risky  proceeding  than  the 
former,  as  here  the  owner  is  not  an  accomphce,  usually 
has  no  reason  for  concealing  his  price,  and  the  details 
of  the  transaction  are  therefore  almost  certain  to  be- 
come known.  In  such  case,  trouble  is  likely  to  ensue 
for  the  promoter. 


CHAPTER  XXV. 
PREPARATION  FOR  PRESENTATION, 


The  majority  of  enterprises  to  be  financed  are  very 
inadequately  prepared  for  presentation.  This  may  be 
due  either  to  ignorance  of  what  is  required  or  to  an 
unwilhngness  to  go  to  the  expense  or  trouble  involved. 
Be  this  as  it  may,  time  after  time  enterprises  are  pre- 
sented in  such  a  crude,  unfit  condition,  with  so  little 
perception  of  what  ought  to  be  provided,  or  what  may 
properly  be  required,  as  almost  to  invite  their  failure. 

An  out-of-town  inventor  will  put  a  bundle  of  draw- 
ings in  his  pocket,  or  a  model  in  his  grip,  and  come 
on  with  the  triumphant  assurance  that  he  has  every 
requisite  for  a  successful  presentation.  The  idea  that 
patent  papers  will  surely  be  called  for,  or  that  he  will 
be  asked  for  a  clear  statement  of  what  his  mechanism 
will  do,  and  why  his  method  is  better  than  others, 
or  that  an  exposition  of  the  general  state  of  the  busi- 
ness will  be  required,  or  that  half  a  dozen  other  things 
will  be  demanded,  never  seems  to  occur  to  him. 

Or  the  Western  man  with  a  mine  will  break  out 
some  good  big  samples  of  attractive  ore  and  board 
a  train  for  the  East  with  a  perfect  conviction  that  he 
has  everything  for  his  presentation  that  the  most  ex- 
acting could  require.  When  he  is  asked  for  maps, 
title  papers,  assays,  expert  reports  and  the  other  neces- 

265 


266  FINANCING  AN    ENTERPRISE. 

sary  features  of  a  proper  presentation,  he  is  totally 
unprepared.  His  omissions  may  be  rectified,  but  this 
involves  delay,  and  when  he  is  ready  the  interested 
parties  have  probably  cooled  off  and  the  unready  miner 
must  prospect  further  for  the  capital  he  needs. 

It  must  be  borne  in  mind  that  the  financing  of  an 
enterprise  is  a  very  particular  matter.  Interested  par- 
ties may  be  discovered  almost  at  the  first  attempt; 
more  often  only  after  considerable  search;  sometimes 
not  at  all ;  but  whenever  they  are  found,  the  materials 
for  the  presentation  should  be  at  hand  so  that  it  may 
be  made  while  the  opportunity  offers. 

Before  a  presentation,  then,  the  enterprise  itself 
should  be  put  in  the  best  possible  condition  and  every- 
thing should  be  provided  that  may  with  propriety  be 
required  by  parties  investigating  the  proposition,  or 
that  is  necessary  to  give  a  proper  and  favorable  knowl- 
edge of  the  undertaking,  or  that  will  be  required  in 
conducting  the  negotiations.  Some  of  this  preparation 
and  material  may  not  be  necessary.  The  probabilities 
are  that  most  of  it  will,  and  when  anything  of  the 
kind  is  needed,  like  the  Texan's  pistol,  it  is  needed 
badly — in  fact,  it  must  be  had.  Many  a  promising 
trade  has  been  broken  off  and  lost  absolutely  just  from 
lack  of  this  proper  preparation. 

As  a  first  step  towards  the  presentation  of  an  enter- 
prise to  be  financed,  the  invention,  the  business,  the 
mine,  or  the  other  property  or  undertaking  upon  which 
it  is  based,  must  be  gotten  into  the  best  possible  busi- 
ness shape,  both  as  to  physical  features  and  as  to  the 
general  conditions  with  which  it  is  surrounded. 

The  importance  of  this  is  obvious.     The  most  de- 


PREPARATION  FOR  PRESENTATION.       267 

sired  and  most  desirable  condition  of  any  enterprise 
is  that  of  a  "going  concern."  If  the  enterprise  is  a 
going  concern  it  will  naturally  be  regarded  with 
greater  favor  and  secure  finance  on  better  terms  if 
in  the  best  possible  operative  condition.  If  it  is  not  a 
going  concern  the  nearer  this  state  is  approximated, 
the  stronger  the  presentation  that  can  be  made,  the 
greater  its  attractiveness  to  the  conservative  investor 
and  the  better  the  terms  upon  which  the  necessary 
finance  may  be  obtained. 

For  example,  suppose  an  ingenious  inventor  has 
devised  a  new  and,  to  all  appearances,  a  much  im- 
proved typewriter  of  a  standard  pattern  and  wishes 
to  get  the  necessary  funds  to  develop,  patent  and  push 
his  invention.  At  the  time  of  consideration  it  exists 
merely  as  a  design  in  a  more  or  less  complete  condi- 
tion. 

At  this  stage  a  long  and  tedious  road  lies  between 
the  invention  and  final  commercial  success.  Patents 
are  to  be  secured  in  the  face  of  the  multitude  of  type- 
writer patents  already  granted  and  this  is  likely  to  be 
difficult.  The  device  may  prove  to  have  been  already 
patented,  or  to  be  not  patentable,  or  there  may  be 
important  interferences  and  long,  vexatious  delays  and 
costly  legal  work,  and  possibly  unjust  and  damaging 
decisions  to  be  fought,  or  to  be  acquiesced  in  as  busi- 
ness policy  may  dictate.  If  the  patents  are  finally 
granted,  the  claims  may  be  so  attenuated  or  so  mate- 
rially modified  as  to  be  of  but  little  value,  or  to  permit 
of  easy  evasion. 

Also,  after  the  patents  are  secured,  or  if  the  owners 
of  the  enterprise  are  sufficiently  confident,  while  the 


268  FINANCING   AN    ENTERPRISE. 

applications  are  pending,  models  must  be  constructed 
in  order  to  demonstrate  the  workings  of  the  mechan- 
ism. Or  possibly  a  caveat  will  be  filed,  or  perhaps 
merely  a  preliminary  search  of  the  patent  records  will 
be  made  to  determine  as  far  as  may  be  the  patenta- 
bility of  the  device,  and  if  the  results  of  this  search 
are  satisfactory,  models  will  be  constructed  before 
either  a  caveat  or  patent  applications  are  filed.  This 
is  a  somewhat  risky  proceeding,  as  a  patent  is  never 
secure  until  it  is  actually  granted,  but  it  has  the  ad- 
vantage of  allowing  the  original  patent  applications 
to  cover  the  mechanism  with  all  its  features  as  finally 
decided  upon,  instead  of  merely  covering  the  first  rude 
designs  that  are  almost  invariably  greatly  modified 
by  the  experimental  work  of  model-making. 

Be  this  as  it  may,  if  a  model  is  attempted  the  work 
will  be  heavily  expensive.  No  matter  how  experi- 
enced or  how  practical  the  inventor,  the  model  work 
is  almost  certain  to  show  numerous  defects  in  the 
original  designs,  and  suggest  many  improvements  to 
be  introduced  before  a  practical  working  mechanism 
is  obtained.  Not  infrequently  the  demonstration  of 
the  model  calls  for  a  total  recasting  of  the  original 
device,  or  for  what  is  practically  a  new  invention, 
retaining  not  one  single  important  feature  of  the  origi- 
nal design.  Occasionally  the  nature  of  the  invention 
itself  is  changed,  as  in  a  recent  somewhat  remarkable 
case  where  the  inventor,  having  secured  the  financial 
backing  of  friends,  started  in  to  develop  designs  for 
a  smoke  consumer  of  a  supposedly  very  superior  pat- 
tern. After  the  expenditure  of  much  time,  thought 
and  money,  the  smoke  consumer,  by  a  not  entirely 


PREPARATION  FOR  PRESENTATION.       269 

unnatural  process  of  evolution,  became  an  improved 
furnace  feed.  Thence,  however,  by  a  very  singular 
metamorphosis  that  has  not  yet  been  satisfactorily 
explained,  the  erstwhile  smoke  consumer  emerged 
triumphantly  from  the  debris  of  inventions  and  experi- 
ments as  a  very  effective  gas  stove.  This  was  patent- 
ed, manufactured  and  put  on  the  market  with  much 
success  and  to  the  very  considerable  financial  advan- 
tage of  those  immediately  concerned. 

In  the  case  of  our  supposed  typewriter,  however, 
even  after  the  invention  is  patented  and  worked  out 
to  a  more  or  less  successful  conclusion — which  is 
usually  a  matter  of  many  thousands  of  dollars — a  fur- 
ther and  much  larger  investment  is  then  necessary  in 
order  to  provide  the  tools  and  machinery  for  its  manu- 
facture. One  hundred  thousand  dollars  would  be  a 
very  modest  estimate  of  the  total  cost  of  development 
and  of  equipment  of  factory.  After  all  this  has  been 
accomplished  there  still  lies  before  the  enterprise  the 
very  difficult  problem  of  working  up  a  prosperous 
business  in  the  face  of  strong  and  able  competition. 

All  this  confronts  the  inventor  in  the  first  inception 
of  the  enterprise  and,  if  the  men  with  money  are  at 
all  experienced  in  matters  of  the  kind,  is  known  to 
them.  It  is  true  that  in  other  lines  the  difficulties  to 
be  overcome  might  not  be  so  great  as  in  the  some- 
what crowded  and  very  troublous  field  of  typewriter 
invention,  but  in  any  case  where  an  inventor  and  an 
untried  invention  are  concerned,  the  obstacles,  risks 
and  probable  expenditures  are  great. 

At  this  early  stage  the  inventor  may  secure  the 
money  he  needs — it  is  frequently  done — but  it  is  usu- 


2/0  FINANCING  AN    ENTERPRISE. 

ally  a  matter  of  difficulty  and  great  inducements.  It 
is  then  largely  a  speculative  offering  and  must  be 
financed  as  such. 

If,  however,  before  endeavoring  to  finance  his  inven- 
tion, the  inventor  carries  it  a  step  further,  and  secures 
his  patents,  the  situation  is  very  much  improved.  Be- 
fore, patents  might  have  been  refused,  or  be  granted 
but  in  part,  and  the  investment  be  more  or  less  of  a 
loss.  Now  this  very  serious  danger  is  removed,  the 
actual  expenditures  involved  in  securing  the  patents 
have  been  made,  and,  while  there  are  still  many  trou- 
bles before  the  enterprise,  substantial  progress  has  been 
made,  its  general  condition  is  better  and  it  is  therefore 
more  attractive  to  the  investor.  Money  would  then 
be  much  easier  to  secure  and  the  interest  that  must 
be  offered  for  this  money  would  be  less  than  before. 

If  the  patents  had  not  only  been  secured,  but  in 
addition  a  successful  working  model  could  be  shown, 
the  conditions  of  the  enterprise  would  be  immeasura- 
bly better.  Then,  granting  that  the  new  device  had 
merit,  there  would  be  only  the  ordinary  business  risk 
before  the  enterprise,  and  the  inventor  would  receive 
ready  and  even  eager  attention  from  practical  men  who 
at  an  earlier  stage  could  not  have  been  interested  on 
any  terms. 

It  is  to  be  noted  and  remembered  that  unless  the 
inventor  and  his  immediate  associates  have  sufficient 
financial  strength  to  carry  the  matter  through  to  the 
position  of  a  successful  business  enterprise,  this  is 
about  as  far  as  it  is  expedient  for  them  to  go.  The 
inventor  is  still  well  within  the  limits  of  his  own 
province  and,  with  a  patented  invention  and  a  success- 


PREPARATION  FOR  PRESENTATION.  27 1 

ful  model,  he  is  at  least  theoretically  in  a  position  to 
meet  the  investor  with  composure.  His  patents  are 
running  against  him,  it  is  true,  but  with  seventeen 
years  in  store,  a  moderate  delay  is  not  serious  and  if 
the  investor  wishes  to  hold  over  and  negotiate,  the 
inventor  can  do  likewise,  or  can  employ  his  time  in 
looking  up  another  more  active  investor.  It  is  then 
that  he  comes  nearest  to  realizing  the  abstractly  cor- 
rect position  that  the  enterprise  is  as  important  as  the 
money.  In  practice,  he  will  probably  finance  his  in- 
vention at  this  time  on  advantageous  terms  that  be- 
fore would  have  been   absolutely  impossible. 

Should  the  inventor,  however,  decide  to  go  ahead 
with  the  actual  commercial  development  of  the  enter- 
prise and  begin  the  construction  of  tools  and  machin- 
ery, he  is  leaving  the  field  of  invention  and  invading 
the  domain  of  business.  He  must  then  be  very  sure 
that  he  has  the  ability  and  means  to  carry  the  enter- 
prise through  to  financial  success.  Should  he  fail  to 
do  so  and  have  to  ask  for  money  midway,  a  worse 
position  for  the  new  enterprise  could  hardly  be  im- 
agined. It  must  have  more  money  to  save  that  already 
invested.  Meanwhile  it  cannot  stand  still.  It  must 
either  go  forward  or  backward.  Rent  is  running,  bills 
for  labor  and  material  must  be  paid,  general  expenses 
are  mounting  up  with  startling  rapidity,  and  mean- 
while the  inventor  is  busy  looking  for  funds. 

Under  these  conditions  the  enterprise  is  looked  upon 
as  already  a  failure  and  most  men  of  means  will  have 
nothing  to  do  with  it.  It  has  apparently  fallen  before 
its  wings  were  fairly  spread  for  flight.  It  is  the  natu- 
ral victim  for  the  vultures  of  the  financial  world.     As 


2^2  FINANCING   AN    ENTERPRISE. 

a  matter  of  fact,  it  is  unfair  to  style  the  financier  who 
comes  to  the  rehef  of  such  a  crippled  enterprise  a 
"vulture,"  even  though  his  terms  may  be  severe.  The 
parties  to  be  reproached  are  those  who  have  brought 
the  enterprise  into  its  unfortunate  and  embarrassing 
position,  and  the  man  with  money  who  comes  to  its 
relief  and  starts  it  once  more  on  the  way  to  success 
is  entitled  to  a  most  generous  reward. 

If  the  inventor  and  his  friends  are  able  to  carry 
the  enterprise  through  to  commercial  success — as  is 
not  infrequently  the  case  in  matters  involving  less 
expenditure  than  the  manufacture  and  introduction  of 
a  new  typewriter — it  is,  of  course,  advantageous  and 
very  advisable  that  they  should  do  so,  but  unless  they 
are  very  certain  of  their  ability  to  do  this  the  risks 
are  too  great  to  justify  the  attempt. 

Just  where  the  point  for  advantageous  financing  is 
found  will  vary  with  the  nature  of  the  enterprise,  but 
speaking  generally,  the  further  it  is  carried  the  better 
for  the  inventor,  provided  only  that  he  stops  short  of 
any  position  from  which  he  can  neither  advance  nor  re- 
treat, nor  even  stand  still,  but  must  have  quick  money 
to  save  the  enterprise  from  loss  and  possible  disaster. 
He  should  have  as  few  loose  ends  out  as  possible, 
should  keep  everything  clean  as  far  as  he  goes,  and 
.should  go  as  far  as  he  can  carry  the  enterprise  suc- 
cessfully. 

Whatever  the  stage  that  may  have  been  reached 
before  the  enterprise  is  presented  for  financing,  it  is 
a  matter  of  much  importance  that  the  material  condi- 
tions of  the  invention,  mine  or  other  property  upon 
which  the  enterprise  is  based  should  be  of  the  best. 


PREPARATION  FOR  PRESENTATION.       273 

If  the  subject  matter  of  the  enterprise  be  an  inven- 
tion, the  designs  should  be  well  drawn  on  suitable 
paper  and  be  clean  and  workmanlike.  If  a  model  has 
been  constructed,  it  should  be  as  neat,  well  made  and 
business-like  as  possible.  Inventors  are  too  apt  to 
underestimate  the  importance  of  such  matters  and  take 
it  for  granted  that  the  mere  demonstration  of  the 
principles  involved  is  sufficient,  and  that  anything  that 
will  do  this  is  all  that  is  necessary.  They  make  a  sad 
mistake  when  they  do.  A  rickety  model,  tied  with 
strings  and  loose  at  the  joints,  may  demonstrate  the 
principle  beyond  question.  If,  however,  the  model 
breaks  down  once  or  twice  in  doing  so,  or  a  joint 
comes  uncoupled,  or  a  string  untied,  and  the  exhibition 
has  to  wait  until  repairs  are  made,  the  demonstration 
is  very  far  from  satisfactory — so  much  so  that  the  man 
with  money  frequently  concludes  that  the  principle  has 
not  been  demonstrated  at  all,  or  decides  in  his  own 
mind  that  if  the  machine  does  not  work  well  now, 
there  is  doubt  as  to  its  ever  doing  so.  Moreover,  in 
the  minds  of  those  looking  into  an  invention,  the 
character  of  the  model  has  much  weight  as  an  indi- 
cation of  the  kind  of  man  they  are  dealing  with. 

At  times  financial  considerations  will  compel  a 
home-made  model.  If  so,  it  should  be  as  well  made  as 
the  conditions  will  permit.  If  string  must  be  used,  it 
should  be  good  string  and  well  tied.  If  the  model  must 
be  whittled  out  of  wood,  it  should  be  neatly  done  and 
be  as  secure  and  practicable  as  possible.  Its  "lame" 
operation  does  not,  of  course,  really  affect  the  prin- 
ciple, but  it  does  affect  the  "principal" — the  man  to 
whom  the  exhibition  is  being  made.     For  this  reason. 


274  FINANCING   AN    ENTERPRISE. 

if  it  can  be  afforded,  polished  brass  and  shining  steel, 
solidly  mounted  and  forming  a  well-constructed  and 
smoothly-working  mechanism,  are  justifiable  and 
profitable.  The  matter  must  not  be  overdone,  but 
carried  to  the  proper  point,  it  indicates  strength  and 
ability  on  the  part  of  the  inventor  and  places  him  in 
a  favorable  position  for  negotiations. 

In  the  case  of  a  mine,  a  quarry,  a  factory,  a  mill 
or  other  similar  property,  where  power,  massiveness, 
output  or  capacity  are  the  essential  features,  the  same 
regard  to  superficial  appearance  is  neither  necessary 
nor  desirable.  Effectiveness  and  system  are  the  great 
desiderata  in  properties  of  this  kind.  A  certain 
amount  of  roughness,  massiveness,  debris,  grease  and 
dirt  are  practically  inseparable  from  the  recognized 
conditions  of  production,  and  if  not  found,  might  lead 
to  unfavorable  deductions.  The  property  must  not 
convey  the  impression  of  having  been  "slicked  up"  for 
the  occasion — at  least  to  an  unreasonable  degree.  It 
is  expected  that  it  will  be  put  in  the  best  possible  con- 
dition of  effectiveness,  but  anything  beyond  this  is 
not  desirable. 

For  example,  if  additional  funds  are  to  be  secured 
for  a  producing  coal  mine,  a  general  cleaning  and 
overhauling  will  probably  be  undertaken  to  prepare  it 
for  inspection.  This  is  entirely  proper  and  is  expected. 
Engines,  shafts,  hoists,  drifts,  ventilators,  cars,  tipples 
and  the  various  other  paraphernalia  of  the  business 
should  be  placed  in  first-class  working  condition.  If 
this  is  not  done  the  effect  produced  upon  those  inspect- 
ing the  mine  would  usually  be  distinctlv  unfavorable. 

If,  however,  instead  of  stopping  here,  the  powers 


PREPARATION  FOR  PRESENTATION.       275 

in  control  went  further  and,  for  instance,  painted  all 
the  woodwork  a  bright,  unsullied  white,  reduced  the 
culm  heaps  to  pleasing  geometrical  proportions,  at- 
tired the  men  in  fresh  white  duck  suits,  and  presented 
the  breaker  boys  with  clean  hands  and  shining  faces, 
the  effect  would  be  anything  but  happy. 

Of  course  the  overhauling  of  such  a  property  would 
never  be  carried  to  this  ridiculous  extreme,  but  it  is 
a  fact  that  it  may  be  and  very  frequently  is  carried 
too  far.  Usually  the  proper  point  is  the  point  of 
greatest  effectiveness,  but  the  conditions  that  will  best 
evidence  this,  or  be  most  effective  in  financing  the 
property,  will  vary  with  the  circumstances  and  with 
the  character  of  the  men  who  are  to  make  the  inspec- 
tion. At  times  the  inspectors  of  a  mine  such  as  that 
considered  will  even  prefer  a  slovenly  appearance 
under  the  delusion  that  it  indicates  concentration  on 
the  main  features  of  the  industry,  and  shows  that  no 
time  and  attention  are  wasted  on  elegancies  that  might 
be  devoted  to  the  getting  out  of  coal.  On  the  other 
hand,  the  inspectors  may  be  particular  to  the  point 
of  finickiness,  and,  if  this  is  known  in  advance,  the 
property  should  be  prepared  accordingly.  Where  the 
taste  of  the  inspectors  is  not  known,  the  safest  plan 
is  to  put  the  property  into  first-class  operative  condi- 
tion and  go  no  further.  If  this  is  done,  the  impression 
produced — if  the  inspectors  are  business  men — cannot 
be  very  unfavorable  or  such  as  to  stand  in  the  way  of 
business. 

Just  how  far  the  preparation  of  a  property  for  in- 
spection may  be  properly  carried,  when  such  prepara- 
tion may  possibly  mislead,  conceal  or  give  a  distinctly 


276  FINANCING   AN    ENTERPRISE. 

false  impression,  is,  at  times,  a  difficult  question.  The 
salting  of  a  gold  mine,  or  the  "colonizing"  of  tenants 
in  an  office  building,  is  merely  preparation  carried  to 
an  improper  extreme.  Certainly  any  preparation  that 
gives  an  absolutely  false  impression  of  the  property 
or  its  possibilities  is  "beyond  the  pale."  The  fairest 
preparation  would  be  such  as  would  be  made  prepara- 
tory to  a  formal  inspection  of  the  property  by  an 
owner,  a  superintendent,  or  someone  else  familiar  with 
its  general  features  vipon  whom  no  false  impressions 
would  be  attempted  or  be  possible.  Everything  would 
be  put  in  the  best  possible  condition,  but  there  would 
be  no  concealment,  no  attempt  at  imposition;  defects 
would  neither  be  suppressed  nor  exaggerated ;  the 
property  would  be  exhibited  at  its  best,  but  not  as 
being  better  than  its  best. 

It  is  not,  of  course,  to  be  expected  that  the  parties 
interested  in  a  property  will  specially  emphasize  its 
defects.  On  the  contrary,  it  is  expected  that  they  will 
minimize  them,  and  that  the  strong  points  will  be 
emphasized.  It  is  not  expected,  however,  that  they 
will  deliberately  attempt  to  suppress  or  conceal  any 
materially  weak  points,  and  should  they  do  so,  it  might 
later  afford  ground  for  very  troublesome  legal  pro- 
ceedings. 

Sometimes  this  whole  point  is  avoided,  the  parties 
owning  or  controlling  the  properties  simply  declining 
to  make  any  representations  or  guarantees  in  regard 
to  them,  stating  that  the  properties  are  there  subject 
to  inspection  and  for  sale  at  the  stated  price ;  that  the 
parties  looking  into  them  can  conduct  the  inspection 
as  they  see  fit  and  draw  their  own  conclusions.     This 


PREPARATION  FOR  PRESENTATION.       277 

"caveat  emptor"  position  is  not  improper,  but  is  sus- 
picious, and  would  in  many  cases  be  held  sufficient 
ground  for  a  termination  of  the  negotiations.  The 
parties  investigating  properties  under  any  such  condi- 
tions must  look  for  and  expect  to  find  defects  and  bad 
points  that  do  not  appear  on  the  surface. 

Even  in  case  of  a  total  disclaimer  the  party  owning 
the  property  does  not  relieve  himself  of  responsibility 
if  it  can  be  shown  that  he  was  in  possession  of  material 
facts  which  could  not  be  discovered  save  by  accident  or 
by  an  unusual  investigation.  Suppose,  for  example, 
that  a  new  shaft  sunk  on  the  main  vein  of  a  mine 
shows  that  this  vein  pinches  out,  and  that  thereupon 
the  owners  quietly  withdraw  from  the  shaft  and  let 
it  cave  in  or  assist  it  in  so  doing,  continuing  their 
active  work  in  the  old  shafts,  which  are  apparently 
in  a  good  heavy  vein.  They  then  offer  the  mine  for 
sale,  make  no  specific  representations  as  to  the  property 
and  leave  the  inspectors  to  discover  the  conditions  if 
they  can.  Under  these  circumstances  the  owners — al- 
though they  made  no  representations — are  liable  to 
any  purchaser  who  buys  on  the  supposition  that  the 
vein  continues,  just  as  they  would  be  if  they  made 
a  direct  statement  to  this  effect.  They  sold  the  prop- 
erty at  its  face  value,  but  this  apparent  value  was 
false,  and  if  the  owners  can  be  shown  to  have  knowl- 
edge of  this  fact,  they  may  be  held  to  account. 


CHAPTER  XXVI. 
THE  PROSPECTUS  AND  OTHER  PAPERS. 


The  presentation  of  enterprises  falls  roughly  under 
two  heads — public  and  private.  The  public  presenta- 
tion is  usually  made  by  means  of  advertising,  followed 
up  by  printed  matter  of  various  kinds.  Its  object  is 
to  reach  a  large  number  of  people,  and  publicity  is 
sought.  The  private  presentation  may  perhaps  reach 
a  number  of  people,  but  it  is  more  or  less  of  a  "still 
hunt,"  general  publicity  being  avoided  or  looked  upon 
with  indifference.  It  is  usually  a  personal  presentation 
with  printed  or  typewritten  matter  to  reinforce  or 
assist  the  personal  appeal.  The  great  majority  of 
presentations  are  private,  and  for  this  reason  the  pri- 
vate presentation  is  given  the  greater  prominence  in 
the  considerations  of  the  present  and  succeeding 
chapters. 

The  prospectus  is  usually  the  leading  documentary 
feature  of  a  presentation,  around  which  the  others 
revolve.  A  good  prospectus  is  an  invaluable  aid  in 
financing  an  enterprise.  A  poor  prospectus  is  perhaps 
worse  than  none.  A  strong  presentation  with  a  weak 
prospectus  is  practically  an  impossibility.  On  the  other 
hand,  a  strong  and  artistic  prospectus  is  a  better  cover- 
ing than  even  the  mantle  of  charity  for  any  minor 
sins  of  presentation. 

278 


THE  PROSPECTUS   AND  OTHER   PAPERS.  279 

It  may  be  noted  that  the  use  of  the  prospectus  in 
private  presentations  is  by  no  means  invariable.  En- 
terprises are  sometimes  financed  without  it,  the  verbal 
statements  of  the  parties,  coupled  perhaps  with  a 
demonstration  of  the  more  material  features  of  the 
undertaking,  producing  the  desired  financial  results. 

The  writer  recalls  an  instance  of  this  kind  in  which 
a  very  successful  financing  was  conducted  entirely  on 
the  "still  hunt"  basis,  no  prospectus  being  used  and 
no  papers  employed  save  typewritten  statements  ex- 
hibited and  kept  in  the  office  of  the  incipient  company. 
In  this  case  an  expensive  suite  of  offices  was  leased 
and  handsomely  furnished.  A  full  corps  of  officials 
and  selling  agents  were  in  attendance.  These  latter 
were  men  possessing  considerable  social  gifts  and  some 
acquaintance  which  enabled  them  to  reach  men  of 
position  and  means. 

No  advertising  of  any  kind  was  indulged  in,  but 
when  the  scheme  was  in  operation  one  of  these  sales- 
men would  quietly  "tip"  an  acquaintance  that  some- 
thing good  was  being  passed  around  and  that  he  had 
better  be  on  hand.  Such  an  intimation  rarely  failed 
to  excite  interest,  whereupon  the  victim  was  invited 
to  accompany  the  salesman  to  the  company  offices. 
Here  everything  was  on  a  due  scale  of  subdued  but 
substantial  elegance.  The  enterprise  had  for  its  end 
the  production  of  a  certain  material.  Handsome  sam- 
ples of  this  material  were  exhibited  in  various  forms 
and  numerous  applications ;  mysterious  hints  were 
given  of  the  great  profits — mostly  imaginary — being 
reaped  elsewhere ;  weighty  names  of  interested  parties 
were  exhibited ;  plausible  statements  were  freely  made. 


28o  FINANCING   AN    ENTERPRISE. 

and  the  general  impression  was  created  and  well  sus- 
tained that  the  opportunity  of  a  lifetime  was  within 
reach  and  could  by  quick  action  be  grasped  and  held. 

The  whole  presentation  was  artistic,  not  to  say 
aristocratic,  and  was  eminently  successful.  All  the 
money  asked  for  was  secured,  and  the  enterprise  was 
duly  launched.  Its  subsequent  career  was  not  as  pro- 
ductive of  results  as  was  its  financing,  and  the  money 
invested  in  the  enterprise  was  practically  lost — except 
as  to  the  returns  reaped  by  the  promoters. 

Generally,  however,  the  prospectus  and  its  accom- 
panying papers  are  desirable.  In  many  cases  they  are 
essential.  They  may  perhaps  be  used  merely  to  intro- 
duce the  matter,  or  to  reinforce  and  substantiate  a 
verbal  statement,  or  to  follow  up  a  personal  presenta- 
tion ;  or  they  may  do  the  entire  work.  At  some  stage 
of  the  presentation  they  are  reasonably  certain  to  be 
required. 

It  goes  almost  without  saying  that  the  prospectus 
should  be  neat  and  well  arranged  from  a  mechanical 
standpoint.  It  is  true  that  the  main  and  only  end 
of  the  prospectus — as  of  the  other  presentation  de- 
tails— is  to  excite  interest  and  draw  money  into  the 
enterprise,  and  that  everything  else — literary  elegance, 
arrangement,  appearance,  style  and  even  grammar  and 
expression — are  subservient  to  this  one  end.  That  is, 
without  regard  to  anything  else,  that  prospectus  is 
best — within  the  limits  of  legitimate  statement — that 
produces  results,  and  all  else  must  give  way  to  this 
one  object.  It  will  generally  be  found,  however,  that 
the  neatest  and  best  arranged  prospectus,  both  as  to 
matter  and  mechanical  make-up,  is  the  one  that  does 


THE  PROSPECTUS  AND  OTHER  PAPERS.     251 

produce  the  best  results.  A  slovenly,  sketchy,  ill-ar- 
ranged prospectus,  such  as  is  too  often  presented,  with 
important  facts  omitted  or  badly  stated  and  unimpor- 
tant facts  emphasized,  weak  in  appearance  and  even 
weaker  in  matter,  is  an  abomination  quite  sufficient 
in  itself  to  condemn  the  most  meritorious  enterprise. 

If  the  parties  presenting  the  enterprise  are  unable  to 
prepare  a  suitable  prospectus,  they  should  by  all  means 
secure  competent  assistance.  There  are  in  all  the 
larger  cities  men  who  make  a  business  of  preparing 
prospectuses  and  other  commercial  literature.  They 
are  usually  good  in  their  line  and  reasonable  in  their 
charges,  and  where  any  doubt  exists  as  to  the  suita- 
bility of  a  prospectus,  or  as  to  what  should  be  included 
in  it,  or  as  to  its  arrangement,  style,  etc.,  their  assist- 
ance should  be  invoked. 

The  cost  of  such  work  varies  greatly  with  the  char- 
acter and  length  of  the  prospectus,  the  standing  and 
reputation  of  the  writer,  and  the  matter  to  be  included. 
A  good  short  prospectus  of  three  or  four  pages  would 
hardly  be  secured  from  one  of  these  professional 
writers  for  less  than  $25 ;  from  this  price  it  will  range 
up  to  $50  or  $100,  as  the  length  or  difficulty  of  the 
prospectus  increases.  If  the  enterprise  is  important 
and  the  amount  of  work  is  large,  the  price  may  be 
much  more. 

In  most  cases  it  is  possible  to  tell  about  how  long 
any  particular  prospectus  should  be,  and  to  fix  the  price 
for  its  preparation  before  the  work  is  undertaken. 
Wherever  possible  this  should  be  done.  Otherwise, 
with  perfect  good  faith  and  proper  charges  on  the 
part  of  the  writer,  the  cost  of  the  prospectus  may,  at 


282  FINANCING   AN    ENTERPRISE. 

times,  prove  unexpectedly  high — even  to  the  point  of 
embarrassment  if  funds  are  Hmited. 

Sometimes,  however,  it  is  impossible  to  tell  in  ad- 
vance just  what  the  length  and  difficulty  of  a  pros- 
pectus will  be,  and  then  the  matter  must  either  be  left 
to  the  honor  of  the  writer — which  is  usually  safe  with- 
in limits — or  a  lump  sum  be  agreed  upon,  or  a  price 
be  fixed  which  is  not  to  be  exceeded. 

If  in  the  hands  of  a  competent  man,  the  prospectus 
so  prepared  will  be  clean  and  attractive  in  appearance, 
interesting  and  effective  as  to  manner  and  material, 
and  written  with  a  special  view  to  the  party  or  par- 
ties to  be  approached.  In  addition  to  the  actual 
writing  of  the  prospectus,  the  men  who  do  this  work 
will  usually  suggest  the  other  documents  and  materials 
necessary  for  an  effective  presentation,  and  give  such 
other  information  and  advice  in  the  premises  as  may 
be  necessary.  This  incidental  help  is  frequently  worth 
more  than  the  price  paid  for  the  prospectus.  When 
the  prospectus  is  not  to  be  printed,  these  writers  will 
usually  include  in  their  price  the  making  of  a  reason- 
able number  of  copies  so  that  no  additional  expense 
need  be  incurred  in  this  direction. 

If  the  prospectus  is  to  be  printed,  the  professional 
writer  will,  if  desired,  take  charge  of  the  whole  matter, 
or  in  any  case  will  suggest  the  style,  the  design,  the 
paper  to  be  used  and  the  best  material  for  cover,  and 
will  also  correct  proof  and  generally  supervise  and  look 
after  the  matter  until  the  prospectus  is  complete. 

It  may  be  said  here  that  in  a  private  presentation, 
it  is  rarely  necessary  or  even  advisable  to  print  the 
prospectus.     To  do  so  would,  generally  speaking,  be 


THE  PROSPECTUS  AND  OTHER  PAPERS,     283 

somewhat  ostentatious  and  take  away  entirely  that 
air  of  freshness — that  pleasing  suggestiveness  of  a 
"ground  floor"  basis — that  should  characterize  and 
add  to  the  attractiveness  of  the  budding  enterprise. 
For  the  same  reason  it  is  rarely  advisable  to  reproduce 
the  prospectus  by  mimeograph  or  other  copying  device. 
The  ordinary  business  man  is  seldom  deceived  by  any 
such  device,  and  when  a  prospectus  so  duplicated  is 
received,  it  at  once  suggests  to  him  that  the  offering 
is  being  made  generally,  or,  as  it  is  styled  in  promoting 
circles,  is  being  "hawked" — a  proceeding  that  at  once 
relegates  the  enterprise  to  the  lowest  social  circles  of 
financedom. 

It  is  true  that  in  some  large  matters  of  private 
presentation,  and  particularly  where  the  presentation 
is  being  made  by  men  of  means,  the  prospectus  is 
printed  to  advantage.  Here  it  is  known  that  the 
importance  of  the  matter  and  the  financial  ability  of 
the  men  behind  it  justify  this  usually  unnecessary  ex- 
pense. It  does  not  then  convey  any  impression  of 
extravagance  or  of  "hawking."  It  is  also  true  that 
occasionally  in  the  smaller  enterprise  the  printed  pros- 
pectus may  be  used  with  good  effect.  Usually,  how- 
ever, such  conditions  do  not  obtain,  and  the  prospectus 
should  then  be  merely  typewritten  in  a  thoroughly  neat 
but  unostentatious  style.  Side  or  centre  headings  for 
subjects,  wide  spacing  between  paragraphs,  good  mar- 
gins, and  any  other  devices  that  tend  to  make  the 
prospectus  attractive  and  its  presentation  clearer  or 
more  easily  grasped  are  good.  Red  ink.  capitalizing 
and  underscoring  are  helpful  if  not  carried  to  excess. 
but  otherwise  are  worse  than  useless. 


284  FINANCING   AN    ENTERPRISE. 

It  may  be  said  in  passing  that  paper  of  legal  cap  size 
is  usually  preferred  for  prospectus  purposes  when  the 
document  is  to  be  typewritten.  This  may  have  the  red 
marginal  ruling,  found  in  much  of  the  paper  used  for 
legal  documents,  if  desired,  though  the  plain  paper 
is  perhaps  more  generally  used.  Plain  paper  of  letter 
size  is  not  infrequently  employed  for  the  purpose,  but 
a  smaller  sheet  is  hardly  allowable — that  is,  such  paper 
would  ordinarily  produce  an  unfavorable  effect.  What- 
ever the  kind  of  paper  used,  it  should  be  of  good 
quality.  A  thin  paper  may  be  desirable  at  times,  but 
its  quality  should  be  at  least  fair,  and  would  better 
be  first-class.  Where  carbon  copies  are  taken,  it  will 
be  obvious  that  they  should  not  be  given  to  important 
men.  Such  copies  are  entirely  adequate  for  "office 
copies,"  and  may,  perhaps,  be  utilized  for  smaller  or 
unimportant  men,  but  to  parties  whose  money,  influ- 
ence or  co-operation  is  specially  desired,  first  copies 
only  should  be  given. 

The  general  style  of  the  prospectus  will  vary  with 
the  manner  in  which  it  is  employed.  It  may  be  used 
as  the  principal  or  perhaps  the  only  means  of  arousing 
interest  in  an  enterprise,  it  may  serve  as  a  forerunner 
of  a  personal  interview,  or  it  may  merely  follow  and 
reinforce  a  personal  presentation.  In  the  first  two 
cases  the  prospectus  must  be  prepared  on  the  basis 
of  attractiveness.  It  should  be  tasteful  and  even  strik- 
ing in  appearance,  and  interesting  as  to  its  subject 
matter.  It  must  be  arranged  so  that  not  only  he  who 
runs  may  read,  but  so  that  the  runner — or  otherwise 
the  busy  man — will  want  to  read  and  avail  himself 
of  the  opportunity  then  and  there. 


THE  PROSPECTUS  AND  OTHER  PAPERS.     285 

If,  however,  the  prospectus  is  merely  employed  to 
follow  up  a  personal  presentation,  the  parties  to  whom 
it  is  presented  are  supposedly  already  attracted  and 
interested,  and  the  aim  of  the  prospectus  is  then  to 
give  the  most  convincing  and  clearest  possible  state- 
ment of  the  whole  matter,  or  of  its  more  important 
points.  In  such  case  striking  originality  as  to  make-up 
and  expression  is  not  only  unnecessary,  but  at  times 
even  irritating,  making  the  essential  facts  more  diffi- 
cult to  unearth,  and  the  prospectus  should  then  be 
as  plain,  clear  and  direct  as  it  can  be  made.  There  is 
no  longer  the  necessity  for  making  the  prospectus 
striking  and  attractive  in  itself  which  existed  in  the 
first-mentioned  cases. 

The  beginning  of  the  prospectus  is  important.  For- 
merly almost  invariably  the  prospectus  of  an  incor- 
porated enterprise  was  headed  with  the  organization 
data  of  the  company,  including  the  names  of  its  officers 
and  directors.  At  the  present  time  the  tendency  is  to 
relegate  this  very  desirable  information  to  a  less  con- 
spicuous position,  on  the  ground  that  it  is  of  no  im- 
portance to  the  reader  until  after  he  has  become  inter- 
ested in  the  enterprise,  and  that  the  prospectus  is  better 
begun  with  some  attractive  matter  of  real  interest  that 
will  seize  and  hold  his  attention  from  the  start. 

This  general  idea  is  excellent.  It  must,  however, 
be  remembered  that  the  "guinea  pig"  industry  is  not 
entirely  a  thing  of  the  past,  and  that  when  a  name  is 
purchased  with  a  great  price  it  will  hardly  be  hidden 
in  small  type  and  a  remote  corner  of  the  prospectus. 
Also,  not  infrequently  and  with  entire  propriety,  the 
names  of  those  connected  with  an  enterprise  constitute 


286  FINANCING   AN   ENTERPRISE. 

the  strongest  feature  of  its  presentation — the  feature 
of  most  importance  to  those  to  be  interested.  In  any 
such  case  the  names  cannot  be  given  too  great  promi- 
nence, and  they  will  naturally  appear  at  the  head  of 
the  prospectus.  Also  when  the  prospectus  is  to  be  em- 
ployed with  parties  who  are  already  interested,  a 
prominent  position  for  the  names  is  usually  desirable. 

As  a  rule,  however,  and  particularly  in  public  pros- 
pectuses, the  general  principle  that  the  document  should 
be  opened  by  matter  of  more  material  interest  than 
organization  data  and  official  names,  is  entirely  cor- 
rect. In  the  case  of  a  printed  prospectus,  the  whole 
difficulty  is  sometimes  ingeniously  evaded  by  printing 
the  name  of  the  company,  capitalization,  names  of 
officers  and  directors,  etc.,  on  the  inner  cover  page. 
There  its  position  is  almost  as  conspicuous  as  if  placed 
at  the  head  of  the  prospectus  proper.  It  does  not, 
however,  interfere  in  any  way  with  the  strongest  open- 
ing matter  that  can  be  devised.  If  the  reader  is  inter- 
ested in  these  names  and  other  organization  data,  they 
are  at  hand.  If  not,  they  do  not  distract  his  attention 
and  he  can  plunge  at  once  into  the  subject  matter  of 
the  presentation. 

As  to  this  subject  matter  of  the  prospectus,  it  should 
be  clear,  direct  and  logically  connected.  As  far  as 
possible  the  material  should  be  interesting,  but  the 
main  end  to  be  attained  is  a  strong  presentation  of  the 
material  facts  of  the  undertaking,  and  irrelevant  mat- 
ter should  not  be  brought  in  merely  for  the  sake  of 
interest.  All  the  important  points  of  the  enterprise 
must  be  included — unless  some  are  purposely  omitted 
or  reserved   for  more  effective  presentation  in  other 


THE  PROSPECTUS   AND  OTHER   PAPERS.  287 

ways.  A  clear  view  of  the  purposes,  the  scope  and 
the  particular  advantages  of  the  special  enterprise 
must  be  given,  and  to  do  this  the  prospectus  must 
touch  with  more  or  less  fullness  on  all  the  important 
details.  This  should,  of  course,  be  done  in  an  artistic 
manner,  so  that  the  reader  will  not  only  get  a  clear 
understanding  of  the  why  and  wherefore,  but  get  it 
from  such  a  favorable  standpoint  and  in  so  "attract- 
ing" a  manner  that  he  will  be  interested  both  in  the 
enterprise  and  in  its  promoters,  if  possible,  to  the  point 
of  joining  them.  All  through  the  prospectus  this  one 
vital  point  must  be  kept  in  mind — that  its  sole  end 
and  aim  is  to  interest  the  reader  in  the  enterprise  and 
get  him  to  invest  his  money. 

In  a  later  chapter,  entitled  "The  Investor's  Ques- 
tions," is  given  a  list  of  the  vital  points  of  an  enter- 
prise considered  from  the  standpoint  of  the  investor. 
These,  as  will  be  observed,  cover  the  field  quite  broad- 
ly, and  include  in  a  general  way  all  the  important 
details  that  should  be  introduced  into  the  prospectus 
and  be  brought  out  by  the  general  presentation.  It 
is  a  matter  to  be  decided,  of  course,  in  each  particular 
instance,  just  how  much  of  this  information  the  in- 
vestigating parties  are  properly  entitled  to,  how  far 
into  detail  it  is  advisable  to  go,  and  what  should  be 
brought  into  the  prospectus  and  what  left  for  more 
private  discussion.  Speaking  generally,  most  of  the 
information  called  for — as  far  as  the  queries  apply — 
and  possibly  even  more,  is  pertinent  and  legitimately 
to  be  demanded  by  an  intending  investor. 

It  will  be  understood  that  a  public  presentation  is 
contemplated   by   "The   Investor's   Questions,"    while 


288  FINANCING   AN   ENTERPRISE. 

a  private  presentation  is  more  particularly  considered 
here.  This  private  effort  may  be  merely  prelimi- 
nary to  a  public  presentation,  or  it  may  be  the  final 
presentation,  sufficient  money  for  the  full  develop- 
ment and  operation  of  the  enterprise  being  obtained 
without  public  appeal.  In  either  case  the  conditions 
are  different  from  those  of  the  public  appeal  and  call 
for  even  fuller  information.  The  parties  now  entering 
the  enterprise  come  in  on  a  much  broader  basis  than 
does  the  general  investor,  perhaps  supplying  capital 
largely,  possibly  participating,  or  even  taking  over  the 
management,  and  in  any  event  joining  the  enterprise 
more  as  associates  of  those  already  concerned  than  as 
mere  investors  in  its  stock.  They  are  usually  supposed 
"to  come  in  on  the  ground  floor" — though  this  suppo- 
sition is  frequently  somewhat  at  variance  with  the 
facts — and  to  assist  in  the  upbuilding  of  the  under- 
taking, and  they  are  entitled  to  know  and  will  usually 
demand  every  important  detail  of  the  enterprise. 

In  any  event,  every  vital  point  of  the  enterprise 
should  be  included  in  the  prospectus — unless  presented 
in  some  other  way — as  otherwise  not  only  is  necessary 
information  lacking,  but  it  is  a  reasonable  supposition 
that  it  has  been  suppressed  intentionally.  On  the  other 
hand  the  presentation  should  not  be  too  full.  Detail, 
if  carried  too  far,  is  obscuring.  Also  some  points  may 
with  propriety  be  omitted  from  the  prospectus  as  not 
being  vital,  and  as  tending  to  give  a  wrong  impression 
of  the  undertaking. 

As  to  the  points  that  may  be  omitted  from  the  pros- 
pectus, judgment  is  required.  So  much  of  the  facts 
should  always  be  given  as  is  necessary  to  a  fair  esti- 


THE   PROSPECTUS    AND   OTHER   PAPERS.  289 

mation  of  the  real  value  of  the  enterprise,  but,  beyond 
this,  prejudicial  details  are  properly  omitted.  The 
public  has  been  trained  by  long  and  costly  experi- 
ence to  expect  that  the  favorable  points  of  an  enter- 
prise will  be  emphasized  to  the  utmost  and  that  un- 
favorable points  will  either  be  omitted  entirely  or  be 
touched  upon  as  lightly  as  the  law  and  the  conscience 
of  the  presenter  will  permit.  If,  then,  a  contrary 
policy  is  pursued,  a  distinctly  false  impression  is  likely 
to  be  given  by  the  very  effort  to  be  fair. 

To  state  the  matter  briefly,  the  owners  of  an  enter- 
prise are  not  justified  in  misrepresentation  or  material 
suppression,  but  they  are  entitled  to  such  a  presenta- 
tion as  will  exhibit  the  enterprise  in  a  favorable  light 
— the  light  in  which  it  appears  to  its  friends.  They 
can  therefore  fairly  omit  non-essential  details  that 
would  interfere  with  such  a  presentation. 

As  to  the  termination  of  the  prospectus,  it  may  be 
said  that  here,  as  in  any  other  case  of  salesmanship, 
the  strongest  appeal  and  most  convincing  arguments 
should  be  brought  to  bear.  In  other  words,  the  sale 
must  be  clinched  while  the  purchaser  is  still  under 
the  spell. 

This  is  one  of  the  most  difficult  features  of  the 
presentation,  and  particularly  of  the  public  presenta- 
tion, in  .which  the  influence  of  the  salesman  must  be 
exerted  at  long  range  and  through  the  medium  of  cold 
type.  To  excite  an  interest  is  not  hard.  With  a  good 
proposition  well  presented  this  interest  may,  without 
much  difficulty,  be  worked  up  to  the  point  of  a  desire 
to  purchase.  To  change  this  desire  into  an  active 
and  reasonably  fixed  determination   is  very  difficult. 


290  FINANCING   AN    ENTERPRISE. 

It  usually  requires  not  only  a  strong,  effective  and  well 
closed  presentation,  but  facilities  for  prompt  execution 
of  the  reader's  resolve.  Otherwise  the  whole  impres- 
sion may  be  dissipated  and  lost.  To  this  end,  if  the 
presentation  is  private,  the  party  presenting  the  pros- 
pectus will  probably  close  the  matter  in  person.  If 
the  presentation  is  public,  order  blanks,  return  en- 
velopes and  full  instructions  for  remittance  will  prob- 
ably be  enclosed  with  the  prospectus.  Nothing  should 
be  omitted  in  any  case  that  will  make  actual  subscrip- 
tion easier. 


CHAPTER  XXVII. 

THE  PROSPECTUS  AND  OTHER  PAPERS. 

(Continued) 


When  a  public  presentation  is  to  be  made  the  papers 
required  are  much  the  same  as  in  a  private  presenta- 
tion. Because  of  the  large  quantities  required,  they 
will  of  necessity  be  printed.  As  a  rule,  the  documents 
employed  should  be  as  few  in  number  as  will  properly 
cover  the  facts  to  be  made  known.  If  a  mass  of 
printed  matter  is  sent  out  to  enquirers,  as  is  frequent- 
ly the  case,  it  prevents  a  clear,  concise  presentation, 
is  confusing,  and  careful  study  is  required  on  the  part 
of  the  recipient  to  establish  the  connection  between 
the  numerous  documents.  A  busy  man  cannot  stop 
to  do  this;  others  will  not  take  the  trouble,  and  the 
general  result   is  bad. 

For  the  same  reason  the  text  of  the  prospectus 
should  not  be  too  much  broken  up  by  the  inclusion 
of  extracts,  papers  or  related  matters.  If  copies  of 
leases,  option  contracts,  expert  reports,  etc.,  etc.,  are 
to  be  presented  in  close  connection  with  it,  these  should 
as  a  rule  come  after  the  prospectus  proper  in  the  form 
of  exhibits,  reference  perhaps  being  made  to  them  in 
the  text.  They  will  then  form  part  of  the  general 
prospectus  and  will  be  bound  up  with  it,  but  will  not 
break  and  weaken  its  argument. 

291 


292  FINANCING   AN    ENTERPRISE. 

This  does  not,  of  course,  apply  where  an  extract, 
a  statement,  or  a  document  is  so  nicely  in  line  with 
the  general  context  of  the  prospectus  that  it  continues 
and  strengthens  the  argument,  but  only  where  it  would 
break  the  connection  and  interfere  with  the  general 
arrangement  and  appearance.  Frequently  when  such 
closely  related  matters  are  brought  into  the  text  of 
the  prospectus,  they  are  printed  in  smaller  type  and 
the  whole  matter  is  so  arranged  that  these  inclusions 
may  be  easily  distinguished  and  be  skipped  by  the 
reader  if  he  desires.  In  such  case  the  general  matter 
is  arranged  so  that  this  can  be  done  without  losing 
the  continuity  of  the  presentation. 

The  general  style  of  the  printed  prospectus  should 
always  be  good.  The  very  ornate  prospectuses  occa- 
sionally gotten  out  in  green  and  gold  and  other 
striking  color  combinations,  with  tinted  ink,  costly 
illustrations  and  a  general  disregard  of  expense,  are 
not  to  be  commended,  unless  required  by  the  nature 
of  the  enterprise  and  the  character  of  the  people  to 
whom  they  are  to  be  presented.  They  savor  of  ex- 
travagance and  suggest  gold  bricks. 

On  the  other  hand,  a  prospectus  on  inferior  paper, 
poorly  printed,  or  poorly  arranged,  is  even  worse.  It 
cannot  be  attractive,  and  therefore  fails  in  the  first 
essential.  Almost  invariably  it  will  be  found  to  fail 
in  other  important  respects.  Further,  if  those  in 
charge  of  the  enterprise  cannot  get  up  a  clean-cut, 
attractive  and  business-like  prospectus — both  as  to 
matter  and  manner — it  is  a  direct  and  fair  conclusion 
that  their  administration  of  the  enterprise  will  be 
equally  lacking.  Such  a  prospectus  therefore  not  only 
fails  to  attract  investors,  but  actually  repels  them. 


THE  PROSPECTUS  AND  OTHER   PAPERS.  293 

A  good  prospectus  need  not  necessarily  be  an  ex- 
pensive prospectus.  It  should,  however,  be  tasteful, 
well  arranged,  and  of  live  and  attractive  appearance. 
Good  side  or  centre  headings  for  subjects  set  off  the 
prospectus,  prevent  a  too  solid  appearance  and  are 
an  assistance  to  the  reader  in  grasping  the  logical  con- 
nection. Illustrations,  if  they  can  be  brought  in  to 
assist  the  text,  are  good  and  add  materially  to  the 
presentation.  If,  however,  the  illustrations  have  no 
direct  bearing  on  the  subject,  as  is  frequently  the  case, 
they  are  at  the  best  useless  and  in  some  cases  are 
actively  detrimental,  distracting  attention  from  the 
main  issue  and  thereby  weakening  the  prospectus. 

A  cut  showing  the  beautiful  scenery  of  the  sur- 
rounding country  would  be  irrelevant  in  a  mining 
prospectus,  as  would  also  an  illustration  of  the  ancient 
method  of  curing  rubber  in  a  prospectus  of  a  rubber 
plantation.  On  the  other  hand,  in  the  mining  pros- 
pectus a  diagram  of  the  workings  of  the  mine  or  an 
illustration  of  an  existing  plant,  or  a  cut  showing 
timber  reserves  or  water  rights  belonging  to  the  prop- 
erty would  be  relevant,  and,  if  impressive  or  attract- 
ive, or  supplementary  to  the  text,  would  be  helpful. 
Also  pictures  of  the  warehouses  or  other  buildings  on 
the  rubber  plantation,  or  of  the  processes  actually  used 
or  to  be  used  in  collecting,  curing  and  shipping  the 
material  might  be  used  to  advantage  in  the  prospectus 
of  the  rubber  plantation. 

Sometimes  irrelevant  cuts  are  used  for  the  mere 
purpose  of  breaking  up  and  lightening  a  too  solid  text, 
but  if  appropriate  illustrations  cannot  be  secured,  this 
is  better  accomplished  by  subject  headings,  paragraph- 
ing and  other  similar  means. 


294  FINANCING   AN    ENTERPRISE. 

The  cost  of  printing  a  prospectus  will  vary  greatly, 
from  the  few  dollars  expended  for  a  single  sheet  pros- 
pectus of  some  small  undertaking  close  at  hand,  and 
therefore  not  requiring  a  full  exposition,  up  to  the 
thousands  of  dollars  expended  in  the  preparation  of 
the  handsome  mining  prospectuses  characteristic  of 
such  flotations. 

If  a  professional  writer  is  employed  to  get  up  the 
subject  matter  of  a  prospectus  he  will  usually  advise 
as  to  the  style  and  cost  of  printing.  Generally  his 
advice  is  good  and  his  estimates  reasonable.  If,  how- 
ever, he  is  a  stranger  to  the  parties  for  whom  he  is 
acting,  it  is  well  to  get  an  estimate  on  the  work  from 
some  outside  printer  for  "checking  up"  purposes. 

A  variance  between  the  figures  when  such  estimates 
are  obtained,  even  though  material,  is  not  necessarily 
an  indication  of  bad  faith  on  the  part  of  the  prospectus 
writer  or  a  proof  of  excessive  charges.  It  may  be  that 
his  printers  are  capable  of  producing  better  and  more 
effective  work,  and  therefore  properly  charge  a  higher 
price.  Or  it  may  well  be  simply  a  printer's  mistake, 
or  the  result  of  different  modes  of  estimating.  Such 
divergences  are  not  uncommon  in  practice  and  before 
a  high  figure  is  rejected  or  a  low  one  accepted,  the 
responsibility  and  artistic  ability  of  the  parties  making 
the  estimates  should  be  investigated.  Good  work  can 
not  usually  be  had  cheap  and  the  best  of  prospectuses 
may  be  spoiled  in  the  printing. 

In  many  cases,  whether  the  presentation  be  public 
or  private,  the  prospectus  will  be  the  only  paper  em- 
ployed. Generally,  however,  one  or  more  other  docu- 
ments are  used  in  connection  with  it  to  make  a  com- 


THE  PROSPECTUS  AND  OTHER  PAPERS.     295 

plete  presentation.  These  additional  papers  will  vary 
in  number  and  nature  with  the  conditions. 

Frequently,  and  in  a  public  presentation  almost  in- 
variably, a  letter  to  the  party  to  be  interested  will 
accompany  the  prospectus.  This  may  be  either  a  fac- 
simile letter,  as  is  usually  the  case  in  public  presenta- 
tions, or  a  personal  letter.  This  letter,  if  not  too 
long,  will  almost  always  be  read,  and  gives  opportu- 
nity for  a  strong  presentation  of  the  most  vital  feat- 
ures of  the  offering,  or  of  those  features  which  should 
appeal  most  strongly  to  the  particular  party.  This 
adds  a  personal  element  to  the  presentation  that  is  at 
times  very  desirable  and  which  could  hardly  be  secured 
with  the  prospectus  alone. 

At  times  in  a  private  presentation  the  owners  of 
an  enterprise  will  not  care  to  submit  their  financial 
proposition  in  the  prospectus,  or  to  present  it  at  all 
until  they  know  that  the  parties  with  whom  they  are 
negotiating  are  at  least  interested  in  the  matter.  In 
any  such  case  the  financial  proposition  will  appear  as 
a  separate  document  only  to  be  shown  when  clearly 
required. 

Many  practical  reasons  may  exist  to  justify  such 
reserve.  For  instance,  it  may  be  of  the  greatest  im- 
portance to  the  owners  of  an  enterprise  to  secure  a 
few  thousand  dollars  of  "quick"  money.  Perhaps 
some  unexpected  obligation  has  arisen  and  found  them 
unprepared,  or  certain  properties  are  perhaps  to  be 
purchased,  or  desirable  options  to  be  secured,  or  in- 
ventors to  be  subsidized,  or  something  else  of  vital 
importance  to  be  done  and  done  quickly.  The  com- 
paratively small  sum  of  money  required  may  in  itself 


296  FINANCING   AN    ENTERPRISE. 

possibly  increase  the  value  of  the  enterprise  many- 
fold.  The  owners  are  therefore  willing  to  make  al- 
most any  concession  to  secure  it,  perhaps  offering  a 
good  stock  at  twenty  cents  on  the  dollar,  or  even  less. 

When  the  money  for  their  immediate  needs  is  once 
secured,  however,  the  owners  are  in  a  totally  different 
position  and  such  sacrifices  are  no  longer  necessary. 
Then  they  may  still  wish  to  sell  stock,  but  on  a  very 
different  basis,  perhaps  at  fifty  cents  on  the  dollar, 
or  even  at  par.  If,  then,  it  is  generally  known  that 
but  a  short  time  previously  this  very  stock  was  offered 
at  the  heavy  discount  mentioned,  investors,  without 
regard  to  the  real  value  of  the  stock,  will  be  found 
very  reluctant  and  perhaps  entirely  unwilling  to  pur- 
chase at  the  higher  price  now  asked.  This  is  an  un- 
reasonable position  on  the  part  of  the  purchaser,  for 
his  investment  should  be  made  on  the  basis  of  the 
proposition  as  it  stands,  not  as  it  stood  at  some  pre- 
vious time,  but  as  a  matter  of  fact  this  would  be  his 
position  if  the  conditions  were  known.  It  is  therefore 
much  better  that  any  such  conditions  should  not  be 
generally  known. 

Many  other  circumstances  may  arise  under  which 
it  is  advisable  to  reserve  the  financial  proposition, 
and  in  any  such  case  a  general  prospectus  is  first  pre- 
pared, giving  a  forcible  presentation  of  the  enterprise 
as  a  whole  and  stating  possibly  the  capitalization  of 
the  company,  its  organization  and  its  purposes,  but 
not  going  into  the  details  of  the  financial  offer.  The 
sale  of  stock  may  perhaps  be  referred  to  in  a  general 
way,  the  statement  being  made  that  stock  of  the  com- 
panv  is  to  Ije  sold  to  secure  funds  for  working  capital. 


THE    PROSPECTUS   AND   OTHER    PAPERS.  297 

for  the  development  of  the  property,  for  the  purchase 
of  machinery  or  for  any  other  purpose  that  might  with 
propriety  be  made  pubhc;  or  the  precise  object  for 
which  the  money  is  to  be  secured  might  be  covered 
and  concealed  by  the  very  convenient  phrase,  "for  the 
purposes  of  the  company." 

Then,  in  addition  to  this  general  prospectus,  a  finan- 
cial statement  is  prepared.  This  is  usually  very  short 
and  much  to  the  point.  The  principal  features  of  the 
enterprise  having  been  already  discussed  in  the  pros- 
pectus, need  not  be  gone  into.  All  that  is  necessary 
is  the  statement  that  so  much  money  is  needed,  with 
usually  a  brief  explanation  of  the  purposes  to  which 
it  is  to  be  applied,  and  that  so  much  stock  is  offered 
at  such  a  price  to  secure  this  money.  This  financial 
statement  is  not  given  out  with  the  prospectus,  but 
only  when  the  owners  are  convinced  that  the  parties 
with  whom  they  are  negotiating  are  interested  to  an 
extent  that  justifies  the  full  presentation. 

The  general  financial  details  of  the  company,  such 
as  its  capitalization,  stock  or  funds  in  the  treasury, 
property  owned,  etc.,  might  go  in  either  document 
with  entire  propriety.  If  included  in  the  general  pros- 
pectus, however,  the  essential  features  should  be  re- 
peated in  the  financial  statement  to  avoid  the  necessity 
of  consulting  both  documents  for  a  full  understanding 
of  the  financial  proposition. 

Sometimes  in  connection  with  the  main  or  general 
prospectus  a  brief  preliminary  statement  will  be  found 
advantageous,  serving  as  a  "forerunner"  to  prepare 
the  way  for  the  prospectus.  In  many  cases,  if  the  main 
prospectus  were  presented  first  to  a  busy  man  he  might 


298  FINANCING   AN    ENTERPRISE. 

decline  entirely  to  wade  through  it,  or  if  he  did  read  it, 
might  do  so  in  such  a  casual  manner  as  to  lose,  misun- 
derstand, or  fail  to  see  the  bearing  of  important  and 
even  essential  features,  and  because  of  this  possibly 
turn  down  a  proposition  in  which  he  ought  to  be  vitally 
interested.  To  prevent  this — if  it  were  suspected  that 
such  might  be  the  case — a  short  digest  or  resume  of 
the  important  features  of  the  enterprise  is  prepared  in 
a  brief  paragraphed  form  so  that  he  who  runs  may 
read  with  much  facility.  This  gives  all  the  essential 
features  of  the  offering  in  a  condensed,  logically  ar- 
ranged and  mentally  digestible  form,  that  can  be  taken 
in  at  a  glance, — so  much  so  that  even  a  preoccupied 
man  seeing  it  could  not  fail  to  get  a  fair  idea  of  the 
enterprise  and  its  bearing  on  his  own  affairs.  If  he 
were  not  interested,  that  would  end  the  matter.  If  he 
were  interested,  the  attack  would  be  followed  up  by 
the  more  formal  prospectus,  or  in  such  other  way 
as  the  conditions  demanded. 

In  connection  with  the  prospectus,  such  other  state- 
ments, certificates,  reports,  assays,  analyses,  etc., 
should  be  secured  or  prepared  as  may  be  necessary 
to  substantiate  material  facts.  The  ordinary  facts 
affecting  the  enterprise,  such,  for  example,  as  the  ex- 
istence of  convenient  and  plentiful  supplies  of  water 
and  fuel,  distances  from  railroad  stations,  cost  of  la- 
bor, etc.,  etc.,  while  they  must  be  fully  stated,  do  not 
usually  require  substantiation.  Other  facts,  perhaps 
of  no  greater  real  importance,  must  be  verified.  The 
nature  of  the  enterprise  and  the  conditions  will  deter- 
mine what  facts  require  such  support. 

When  an  enterprise  is  presented  involving  the  pos- 


THE   PROSPECTUS   AND   OTHER    PAPERS.  299 

session  of  valuable  realty,  certified  abstracts  of  the 
titles  of  this  realty  should  be  provided,  with  such  other 
evidence  as  will  show  its  ownership.  If  the  property 
is  held  under  option,  the  options  themselves,  or  cer- 
tified copies,  should  be  at  hand.  Or  if  the  property 
is  held  in  whole  or  in  part  by  franchise,  lease,  govern- 
ment patent  or  similar  title,  either  the  original  docu- 
ments evidencing  the  ownership  of  the  property,  or 
duly  certified  copies  should  be  provided,  or  be  readily 
accessible.  In  case  of  any  doubt  or  possibility  of  doubt 
as  to  the  validity  of  any  important  feature  of  such 
titles,  the  formal  written  opinion  of  a  reputable  and 
qualified  attorney  will  be  found  of  much  weight  and 
advantage. 

In  case  of  an  invention,  the  original  patent  papers, 
together  with  verified  copies  of  any  assignments,  con- 
tracts or  agreements  in  point  should  be  procured.  A 
statement  of  any  interferences  encountered  in  the 
course  of  the  original  applications  is  pertinent,  and, 
if  these  have  been  successfully  overcome,  gives  an 
element  of  strength.  In  any  case  such  a  statement 
will  be  of  assistance  to  those  investigating  the  inven- 
tion, enabling  them  to  determine  the  better  as  to 
its  scope  and  the  liability  of  interference  or  competi- 
tion when  it  is  placed  on  the  market.  The  opinion 
of  the  patent  attorney  through  whom  the  patents  were 
secured,  as  to  the  novelty  and  merit  of  the  invention 
and  the  strength  and  value  of  the  patents,  is,  if  favor- 
able, a  very  helpful  feature.  If  the  patent  has  been 
involved  in  any  litigation,  the  fact  is  of  much  impor- 
tance and  should  be  set  forth  in  detail. 

It  is  to  be  noted  in  this  connection  that  an  "unad- 


300  FINANCING   AN    ENTERPRISE. 

judicated"  patent  is  looked  upon  doubtfully  in  com- 
mercial circles.  The  fact  of  its  allowance  is,  of  course, 
a  favorable  indication.  It  is  not,  however,  in  itself 
conclusive  evidence  of  a  monopoly  or  even  of  an  ex- 
clusive right  in  its  own  particular  field.  It  may  be 
found  that  the  patent  rights  are  greatly  restricted  or 
even  practically  abrogated  by  similar  inventions  then 
existing,  or  perhaps  conflicting  patents  may  appear 
later.  All  that  the  unad judicated  patent  proves  is  that 
in  the  opinion  of  the  patent  office  the  invention  in 
question  is  a  "new  and  useful  improvement"  and  does 
not,  as  far  as  the  examiners  can  see,  conflict  with  any 
other  new  and  useful  improvement  then  patented  or 
in  course  of  application.  The  owners  of  some  prior 
patent  may  be  of  a  different  opinion,  or  the  owners 
of  another  conflicting  invention  may  appear  later  with 
claims  of  priority,  or  patents  may  be  granted  to  otlier 
similar  inventions  which  subsequently  appear.  These 
possibilities — and  they  are  very  real  possibilities — 
cannot  be  foreseen  with  any  certainty. 

In  any  of  these  cases,  the  courts  must  be  appealed 
to  and  their  decision  prevails.  The  patent  may,  of 
course,  be  upheld  in  every  claim.  The  courts  may, 
however,  decide  that  the  patent  office  ofificials  were 
in  error  in  granting  a  patent  and  the  whole  thing  be 
wiped  out.  Or  perhaps  they  may  decide  against  some 
important  features  of  the  patent,  or  decide  that  these 
features  were  not  properly  patentable,  and  thereby 
destroy  the  supposed  monopoly. 

This  being  true,  patents  are  regarded  as  of  question- 
able value  until  they  are  seasoned  by  a  considerable 
period  of  uninterrupted  enjoyment,  or  until  their  status 


THE   PROSPECTUS   AND   OTHER    PAPERS.  3OI 

is  determined  by  competent  adjudication.  Therefore, 
when  patents  form  part  of  the  presentation,  every 
feature  that  will  in  any  way  strengthen  them  should  be 
brought  forward  and  emphasized. 

If  an  enterprise  is  in  operation  and  actually  paying 
its  way,  and  perhaps  making  profits,  or  if,  in  other 
words,  it  has  reached  the  very  desirable  condition  of 
a  going  concern,  this  condition  will  naturally  be  made 
one  of  the  strongest  of  the  whole  presentation.  It 
shows  that  the  enterprise  has  been  carried  beyond  the 
experimental  stage,  proves  its  commercial  value,  and 
presumably  indicates  that  its  future  and  more  profit- 
able operation  is  merely  a  matter  of  sufficient  funds 
and  good  business  management.  Everything,  then, 
that  bears  on  this  feature  should  be  brought  out  with 
the  greatest  possible  strength  and  clearness.  If  the 
enterprise  has  been  profitable  for  a  number  of  years 
past,  a  statement  should  be  prepared  showing  the  re- 
ceipts, expenditures  and  net  profits  for  each  year ;  and 
if  the  profits  have  been  increasing  each  year,  the  fact 
is  significant  and  important  and  the  presentation  should 
be  so  arranged  as  to  bring  it  out  very  clearly.  Such 
a  statement,  if  presented  to  strangers,  should  either 
be  verified  by  the  certificate  of  an  auditor,  or  perhaps 
of  the  bookkeeper  or  owner  of  the  enterprise,  or  other- 
wise the  books  and  records  should  be  at  hand  to  be 
referred  to  in  case  of  need.  The  nature  of  the  trade 
or  operations  from  which  this  profit  is  derived  should 
usually  be  explained  in  detail,  and  the  reasons  for  be- 
lieving that  the  revenues  derived  therefrom  can  be 
increased  and  the  methods  of  doing  this  are  relevant 
and  important.     A  few  figures  scratched  down  in  a 


302  FINANCING   AN    ENTERPRISE. 

note  book  may  be  a  sufficient  statement  of  business 
operations  for  a  preliminary  discussion  or  for  a  pre- 
sentation among  close  friends,  but  are  utterly  inade- 
quate for  anything  more  formal. 

If  the  property  or  undertaking  has  undergone  ex- 
pert examination,  the  report  of  the  experts  will,  of 
course,  form  an  important  part  of  the  exhibit  and 
should  be  gotten  up  in  the  best  possible  shape.  No 
matter  how  good  the  report,  if  it  is  untidy,  badly  ex- 
pressed and  poorly  arranged,  it  will  lose  half  its  weight 
even  though  signed  by  a  competent  man — if  a  com- 
petent man  would  sign  a  report  of  the  kind.  If  in 
addition  to  this,  as  is  sometimes  the  case,  the  signa- 
ture of  the  expert  is  omitted  entirely,  or  put  in  with 
a  typewriter  on  the  supposedly  original  copy,  the  re- 
port is  worse  than  useless.  It  shows  incompetency  in 
the  expert  and  in  his  employers,  and  should  justly 
discredit  both  the  undertaking  and  its  presenters. 

Any  contracts  or  agreements  relating  to  the  prop- 
erty or  enterprise,  or  to  its  operation,  should,  of  course, 
be  available,  either  in  the  original  or  in  certified  copies, 
and,  generally,  every  essential  feature  of  the  enter- 
prise should  not  only  be  presented,  but  if  it  can  be 
strengthened  by  outside  statements,  opinions  or  elabo- 
rations, should  be  so  strengthened  to  the  utmost.  All 
these  precautions  may  not  be  necessary,  but  it  is  im- 
possible to  tell  in  advance  just  what  will  be  demanded 
and  when,  and  as  a  matter  of  good  business  prudence 
the  entire  ground — as  far  as  may  be  without  undue 
expense  or  trouble — should  be  fully  covered. 


CHAPTER  XXVIIl. 

THE  PRESENTATION. 
Private  or  Public. 


Whether  the  presentation  of  a  particular  enterprise 
will  be  private  or  public  is  determined  by  the  condi- 
tions. If  the  undertaking  is  not  large,  or  but  com- 
paratively few  persons  are  to  be  interested  in  it,  the 
presentation  will  naturally  be  private.  If  the  under- 
taking be  too  large  for  a  few  persons  to  carry,  or  if 
for  other  reasons  a  number  of  persons  are  to  be  inter- 
ested in  it,  the  presentation  will  as  naturally  be  public. 

A  public  presentation  is  costly,  requires  much  skill, 
experience  and  preparation  and  its  conduct  is  difficult. 
A  private  presentation,  on  the  other  hand,  is  simpler, 
less  expensive  and  usually  more  within  the  scope  of 
the  owner's  or  promoter's  abilities.  Then  but  a  few 
men  are  to  be  dealt  with,  the  formalities  are  simple 
and  the  presentation  may  be  made  on  such  scale  and 
with  such  expense  or  lack  of  expense  as  the  parties  in 
charge  see  fit. 

The  public  presentation  must  of  necessity  be  used 
in  whole  or  in  part  for  the  very  large  financings  char- 
acteristic of  modern  industry.  It  is  also  used  very 
generally  for  conservative  enterprises  of  a  semi-public 
nature,  such  as  banks  and  trust  companies.    It  is  much 

303 


304  FINANCING   AN    ENTERPRISE. 

used  in  financing  the  larger  speculative  enterprises.  It 
is  not  adapted,  however,  for  the  ordinary  enterprise 
of  a  conservative  character,  as  such  an  undertaking 
will  neither  bear  the  expense  of  a  public  presentation 
nor  afford  any  adequate  basis  for  the  extravagant 
claims  and  representations  usually  deemed  necessary 
to  secure  the  smaller  public  subscriptions.  The  private 
presentation  is,  then,  for  most  enterprises  clearly  and 
unmistakably  indicated. 

In  some  cases,  however,  the  character  of  the  enter- 
prise, or  the  conditions  surrounding  it,  or  the  results 
desired,  are  such  that  it  may  be  presented  by  either 
method,  and  then  the  two  must  be  weighed  and  that 
method  selected  which  offers  the  greatest  benefits  for 
the  particular  presentation. 

The  advantages  of  private  presentation  have  already 
been  briefly  stated.  Its  expense  is  light,  its  conduct 
is  within  the  ability  of  the  ordinary  promoter  and  the 
whole  thing  is  "manageable."  A  private  presentation 
is,  however,  sometimes  objectionable  from  the  very 
fact  that  it  is  made  to  a  few  men.  These  few  men 
feel  that  they  are  putting  in  the  money  that  makes 
the  enterprise  and  that  they  should  be  rewarded  in 
accordance  with  the  importance  of  their  part.  Their 
ideas  of  the  importance  of  this  part  are  apt  to  be 
liberal.  It  is  but  seldom  that  they  accept  the  owner's 
proposition  as  it  is  made.  On  the  contrary,  they  in- 
vestigate with  care,  determine  the  merits  and  value 
of  the  enterprise,  estimate  just  how  much  money  is 
required,  ascertain  perhaps  the  personal  necessities  of 
the  owners  or  promoters,  and  the  firmness  with  which 
these  latter  hold  the  enterprise,  and  then,  in  the  light 


THE   PRESENTATION.  305 

of  this  knowledge,  make  a  counter  proposition  which 
is  very  different  from  the  one  made  to  them. 

At  times  when  the  enterprise  is  exceptionally  at- 
tractive, or  is  of  a  very  solid  nature,  and  is  firmly 
held,  money  may  perhaps  he  secured  from  strong 
financial  men  on  the  terms  proposed  by  the  owners, 
sometimes  even  when  these  terms  are  really  unrea- 
sonable. Such  conditions  are,  however,  unusual,  and 
as  a  rule  the  parties  owning  or  controlling  an  enter- 
prise must  expect  to  meet  the  demands  of  the  men 
with  money  and  this  usually  involves  parting  with 
the  control  of  the  enterprise  in  exchange  for  the  money 
required.  A  number  of  people  may,  it  is  true,  be 
appealed  to  by  a  private  presentation,  but  at  the  best 
the  number  reached  cannot  be  large  and  the  difficulties 
of  securing  money  on  the  owner's  terms  still  exist, 
though  perhaps  in  a  less  degree. 

If,  then,  the  parties  owning  the  enterprise  are  not 
themselves  financially  strong,  but  still  wish  to  retain 
absolute  control  of  the  enterprise,  or  desire  to  conduct 
it  without  dictation  or  interference  from  the  men  who 
put  in  the  money,  they  will  usually  be  forced  to  make 
a  more  or  less  public  presentation. 

It  is  to  be  noted  that  a  public  presentation  usually 
contemplates  a  large  number  of  small  contributions. 
Some  of  the  enterprises  financed  in  whole  or  in  part 
by  public  presentation,  such  as  banks,  trust  companies 
and  the  great  industrial  enterprises  and  combinations, 
expect  and  secure  large  individual  subscriptions,  but 
the  usual  speculative  enterprise,  though  requiring  a 
large  amount  in  the  aggregate,  appeals  for  and  expects 
to  secure  but  a  small  amount  from  the  individual  sub- 
scriber. 


306  FINANCING   AN    ENTERPRISE. 

The  success  of  such  an  appeal  depends  upon  the  fact 
that  there  is  a  very  large  class  of  people  of  moderate 
circumstances  to  whom  the  disposition  of  their  sav- 
ings is  a  matter  of  much  perplexity.  Usually,  though 
not  invariably,  these  savings  are  small  in  amount. 
Something  must,  however,  be  done  with  them.  To 
hoard  them  at  home  is  unsafe  and  extravagant.  They 
should  be  out  working  for  their  owners  and  bringing 
in  a  more  or  less  adequate  return,  but  how  to  put  them 
out  safely  and  profitably  is  a  difficult  problem.  The 
modest  three  or  five  per  cent,  of  the  ordinary  con- 
servative investment  is  not  attractive.  Then,  if  these 
people  can  be  convinced  that  an  enterprise  is  reason- 
ably safe  and  that  by  investing  therein  they  will  secure 
at  least  eight  or  ten  per  cent.,  with  good  prospects  for 
much  larger  returns,  and  with  perhaps  a  doubling  or 
trebling  of  the  original  investment  meanwhile,  their 
money  is  apt  to  be  contributed  with  freedom. 

Obviously  under  these  circumstances  money  may  be 
obtained  on  better  terms  for  the  owners  of  the  enter- 
prise than  would  be  the  case  in  the  usual  private  pre- 
sentation. A  man  putting  in  perhaps  $ioo  in  an  enter- 
prise calling  for  hundreds  of  thousands  is  a  small  fac- 
tor. Usually  he  recognizes  this  and  neither  expects  nor 
receives  special  consideration.  The  proposition  framed 
by  the  owners  of  the  enterprise  is  made  to  him  to  be 
accepted  or  rejected  as  he  sees  fit,  but  in  either  case 
without  modification.  If  he  likes  the  offered  enterprise 
he  may  invest;  if  he  does  not,  he  can  let  the  matter 
alone.  If  he  decides  to  invest,  he  pays  his  money  and 
then  goes  on  about  his  more  immediate  and  important 
private  business,  leaving  the  managers  of  the  enterprise 


THE  PRESENTATION.  307 

to  run  it  as  they  see  fit.  If  they  do  this  with  even  rea- 
sonably honest  and  able  management,  there  is  little 
fear  of  interference  on  the  part  of  the  stockholders. 
These  latter  want  profits,  but  beyond  this  do  not  con- 
cern themselves  with  the  conduct  of  the  company. 
The  managers  have  practically  a  free  hand. 

So  far  the  advantages  of  the  public  presentation 
are  patent.  Better  terms  and  greater  freedom  of 
management  are  secured  than  would  usually  be  possi- 
ble in  a  private  presentation.  On  the  other  hand,  as 
each  subscription  is  small,  and  as  each  subscriber  must 
be  worked  up  individually  to  the  pitch  of  investing 
his  small  quota,  extensive,  expensive,  continued  and 
able  work  must  be  done  to  accumulate  the  large  total 
amount  required.  Also  in  case  the  enterprise  is  not 
profitable,  or  but  moderately  so,  the  inquiries  and 
importunities  of  these  numerous  small  stockholders 
are  often  annoying.  Even  when  successful  the  large 
number  of  stockholders  with  their  individual  stock 
certificates,  frequently  transferred,  and  with  the  neces- 
sary notifications  of  meetings,  payments  of  dividends, 
etc.,  etc.,  involves  much  bookkeeping  and  complexity 
that  would  otherwise  be  unnecessary. 

The  advantages  of  the  public  financing  are,  how- 
ever, clearly  marked,  and  where  they  are  indicated 
by  the  nature  of  the  enterprise,  or  desired  by  the 
parties  in  control,  are  easily  sufiicient  to  overbalance 
the  incidental  disadvantages. 

The  public  presentation  is  especially  adapted  and 
is  commonly  used  for  speculative  enterprises  in  which 
the  risks  are  excessive  and  the  rewards  in  event  of 
success  are  proportionately  large.     Particularly  is  it 


308  FINANCING   AN    ENTERPRISE. 

employed  in  those  speculative  enterprises  in  which 
not  only  are  the  risks  desperate  but  the  basic  enter- 
prise is  of  doubtful  merit  and  the  surrounding  con- 
ditions are  of  equally  uncertain  commercial  avail- 
ability. 

For  instance,  a  promoter  secures  control  of  a  mining 
prospect.  It  is  located  in  some  remote  part  of  the 
West,  is  undeveloped,  unequipped  and  of  more  or  less 
uncertain  value.  The  promoter  is  not  an  expert  in 
mining  and  has  no  money  to  develop  the  scheme 
himself. 

If  in  such  case  the  promoter  took  his  enterprise 
to  men  with  money,  they  might  possibly  go  in  with 
him,  but  if  they  did,  would  not  only  take  the  lion's 
share  of  the  profits,  but  absolute  control  of  the  enter- 
prise as  well.  They  would  put  in  only  enough  money  to 
determine  the  value  of  the  prospect  and  devote  all 
these  funds  to  development  on  an  economical  and 
conservative  scale.  The  promoter  would  neither  con- 
trol nor  cut  any  great  figure  in  the  undertaking. 

This  would  not  suit  the  average  promoter  and  he 
would  probably  resort  to  a  public  presentation.  He 
must  then  raise  sufficient  money  for  advertising,  print- 
ing and  office  expenses.  If  he  cannot  do  this  from  his 
own  resources,  he  must  appeal  to  someone  else  for 
funds.  The  party  advancing  the  money  in  such  a  case 
would,  however,  look  for  profits  from  the  sale  of  stock, 
not  from  the  development  of  the  prospect,  and  the 
promoter  would  therefore  get  his  money  on  very 
different  and  much  better  terms  than  if  he  offered  the 
mine  itself.     He  would  also  keep  the  control. 

Having  secured  this  first  money,  the  whole  matter 


THE   PRESENTATION,  3O9 

is  then  one  of  presentation.  Handsome  offices  are 
rented,  the  promoter's  imagination  and  the  country 
surrounding  the  "mine"  are  ransacked  for  "facts," 
attractive  advertisements  are  printed,  glowing  pros- 
pectuses are  put  forth,  a  company  is  organized  with 
a  milHon  or  so  of  capitahzation,  stock  is  issued  and  put 
on  sale  at  a  few  cents  a  share,  and  the  campaign  is  on. 

If  the  presentation  is  good  the  promoter's  troubles 
will  now  near  their  end.  The  smaller  investor  cannot 
really  investigate  the  offering.  He  must  judge  of  the 
enterprise  almost  entirely  from  the  facts  supplied  him, 
and  as  these  facts  are  furnished  by  the  promoter,  they 
are  apt  to  be  very  favorable  to  the  enterprise.  Also 
the  astonishing  opportunity  to  secure  dollar  shares  at 
a  few  cents  each  always  seems  attractive,  and  if  the 
promoter  is  really  skilful  in  his  work,  subscriptions 
will  begin  to  flow  in.  If  he  is  not  skilful  the  promoter 
will  probably  have  a  great  deal  of  trouble  in  meeting 
bills  about  this  time,  and  the  "bright  and  halcyon 
beginning"  will  end  suddenly  and  decisively. 

If  successful  the  money  secured  is  drawn  upon  for 
the  promoter's  compensation,  for  the  payment  of  office 
and  general  expenses  and  for  the  continuance  of  the 
advertising  work.  Any  balance  is  devoted  to  the  de- 
velopment of  the  prospect.  This  work  is  duly  heralded 
as  an  additional  inducement  for  prompt  investment 
before  the  always  expected  wonderful  strike  has  been 
made  and  the  price  of  stock  thereby  raised. 

Not  only  does  the  smaller  investor  find  it  impossi- 
ble to  investigate  an  ofTering  of  this  kind  closely,  but 
it  is  equally  difficult  for  him  to  maintain  supervision 
over  the  progress  of  the  enterprise  thereafter,  and  the 


3IO  FINANCING    AN    ENTERPRISE. 

promoter  is  practically  left  in  complete  control.  Also 
in  case  of  disaster  to  the  enterprise,  whether  from 
mismanagement  or  even  from  fraud,  the  promoter's 
position  is  again  as  desirable  as  it  could  be  under 
such  unfortunate  circumstances.  Each  stockholder  is 
but  one  of  many  and  has  but  a  small  amount  at  stake, 
and  lacks  not  only  sufficient  incentive,  but  usually 
the  knowledge  and  ability  to  enable  him  to  either  re- 
cover his  lost  investment  or  bring  punishment  on  the 
heads  of  the  offenders.  Nor,  as  these  small  stock- 
holders are  almost  invariably  widely  scattered,  is  there 
any  likelihood  of  concerted  action  against  the  manage- 
ment. 

It  is  easily  seen  that  no  single  stockholder  having 
ten,  twenty-five  or  even  one  hundred  dollars  invested 
in  an  enterprise  located  some  hundreds  or  thousands 
of  miles  away,  could  afford  to  employ  lawyers  and 
institute  legal  proceedings  to  protect  or  recover  his 
investment.  Nor  would  it  be  any  more  profitable  or 
practical  for  him  to  hunt  up  his  scattered  fellow  stock- 
holders and  unite  them  in  opposition  to  or  prosecution 
of  the  parties  in  control.  Either  plan  would  involve 
him  in  expense,  largely  in  excess  of  his  personal  in- 
vestment, and  would  be  literally  throwing  good  money 
after  bad. 

lender  these  conditions,  even  in  case  of  actual  fraud, 
no  action  of  any  kind  is  usual.  The  stockholders 
protest  as  vigorously  as  their  ability  as  correspondents 
and  their  distance  from  the  scene  of  action  will  permit, 
and  when  this  proves  ineffective,  pocket  their  losses 
and  of  necessity  charge  the  whole  matter  up  to  ex- 
perience. No  one  else  is  in  a  position  to  act  or  has 
anv  reason  for  acting,  and  the  whole  matter  drops. 


THE   PRESENTATION.  3II 

The  light-fingered  gentry  of  the  financial  world  are 
well  aware  of  the  possibilities  of  these  conditions,  and 
as  a  matter  of  fact  hundreds  of  thousands  of  dollars 
are  secured  from  the  smaller  investors  of  the  United 
States  every  year  by  absolutely  fraudulent  presenta- 
tions. But  little  if  any  punishment  is  ever  inflicted 
upon  these  offenders.  The  swindlers  who  operate 
these  schemes  know  just  how  far  they  can  safely  go, 
and  when  that  point  is  reached  the  "time  for  disap- 
pearing" has  arrived  and  they  are  no  longer  in  per- 
sonal evidence. 

An  interesting  case  of  the  kind  came  under  the 
writer's  observation  some  years  since.  A  "gentleman" 
evidently  versed  in  the  industry  originated  and  pro- 
ceeded to  put  in  operation  a  plan  for  providing  homes 
for  people  of  moderate  means  by  a  series  of  small 
payments — a  modification  of  the  building  association 
idea.  The  association  was  to  be  national  in  its  char- 
acter and  build  homes  for  its  members  in  any  part 
of  the  United  States.  The  payments  were  absurdly 
inadequate  and  long  drawn  out,  and  just  how  they 
were  to  pay  for  the  promised  homes  was  not  made 
quite  clear.  The  company  was,  however,  in  some 
mysterious  way  to  perform  the  part  of  fairy  god- 
mother, and  this  seemed  to  be  satisfactory  to  all  par- 
ties. The  general  idea  was  attractive  and  sufficiently 
plausible  to  gain  the  confidence  of  people  not  used  to 
financial   calculation. 

The  scheme  was  advertised  well  and  extensively 
and  responses  were  numerous.  Also  the  majority  of 
those  who  responded,  including  some  who  apparently 
came  to  scoff,  remained  to  be  preyed  upon,  and  large 


I" 


312  FINANCING    AN    ENTERPRISE. 

amounts  of  money  were  secured  by  the  promoter  of 
the  scheme. 

The  details  of  the  undertaking  were  ingeniously 
arranged  and  it  was  extremely  difficult  to  prove  that 
it  was  fraudulent — the  more  so  because  of  the  further 
ingenuity  of  its  promoter  in  explaining,  evading  and 
keeping  out  of  the  way  of  enquirers.  Complaints  were 
frequently  made  by  those  investing  money,  and  time 
after  time  the  Government  post-office  agents  were 
called  upon  to  investigate.  In  every  case  they  were 
met  and  baffled  by  the  suave  explanations  and  pro- 
testations of  the  proprietor  of  the  scheme.  This  was 
backed,  when  it  became  absolutely  necessary,  by  an 
offer  to  refund  the  money  of  the  complaining  party, 
and  for  nearly  two  years  the  swindle  prospered  un- 
checked. 

Finally  the  postal  authorities  became  impatient  and 
issued  a  fraud  order  forbidding  the  delivery  of  mail. 
This  effectually  cut  the  promoter  off  from  the  profits 
of  his  scheme.  It  also  as  effectually  shut  his  victims 
off  from  the  promoter.  Their  letters  were  returned  un- 
opened, advertising  ceased,  the  promoter  promptly  dis- 
appeared and  the  incident  was  closed.  No  prosecution 
of  the  guilty  party  ever  took  place  or  was  even  attempt- 
ed. For  a  time  the  promoter's  nearby  contributors  call- 
ed at  his  former  office  address  for  information,  but  he 
was  gone — no  one  knew  his  whereabouts  or  could  tell 
anything  about  him,  and  the  visits  soon  ceased.  The 
loss  to  the  victims  in  this  case  will  never  be  known 
— except  in  the  very  improbable  event  of  a  confession 
from  the  promoter — but  they  undoubtedly  ran  far  up 
into  the  thousands. 


< 


THE   PRESENTATION.  313 

In  swindles  of  this  kind  the  promoters  generally 
spend  a  decent  interval  in  semi-retirement  after  their 
enterprise  is  closed  by  the  action  of  the  authorities, 
then  emerge  under  some  new  name,  rent  offices  in 
a  new  location,  and  come  out  with  another  plausible 
scheme  to  relieve  the  same  or  other  victims  of  their 
accumulated  earnings. 

The  numerous  swindling  enterprises  of  this  general 
nature  are  particularly  contemptible  as  defrauding  the 
smaller  investors  who  have  no  adequate  means  of 
protection — save  by  a  strict  avoidance  of  the  field  of 
investment — and  to  whom  the  loss  is  nearly  always 
a  matter  of  suffering  or  deprivation.  They  also  have 
a  very  unfortunate  effect  on  the  whole  system  of 
financing  by  public  presentation.  It  is  hardly  to  be 
expected  that  the  ordinary  individual  can  discern  be- 
tween the  glowing  statements  printed  by  a  concern 
that  is  financing  a  legitimate  undertaking,  and  the 
still  more  glowing  statements  printed  by  a  concern 
which  is  financing  a  fraud.  As  a  consequence,  the 
smaller  investors  are  suspicious  of  all  enterprises  seek- 
ing their  money  by  public  presentation,  and  the  work 
is  rendered  far  more  expensive,  difficult  and  meagre 
of  results  than  would  otherwise  be  the  case.  It  is 
therefore  a  matter  of  peculiar  gratification  when  swin- 
dlers of  this  type  are  caught  in  the  meshes  of  the  law 
— as  does  occasionally  happen — and  reap  the  proper  re- 
wards of  their  misdeeds. 


CHAPTER  XXIX. 

PRIVATE  PRESENTATION. 
Among  Friends. 


When  an  enterprise  is  to  be  financed  by  private 
presentation,  the  promoter — the  term  as  used  here  in- 
cluding anyone  actively  interested  in  the  financing  of 
an  enterprise — must  decide  whether  to  appeal  to  those 
with  whom  he  is  in  personal  touch,  such  as  friends, 
associates  or  acquaintances,  or  to  strangers.  Speaking 
generally,  whenever  the  conditions  will  permit,  the 
presentation  is  best  made  to  friends,  for  a  man  should 
possess  a  standing  and  reputation  among  his  acquaint- 
ances which  is  established  with  difficulty  among 
strangers,  and  he  should  therefore  secure  money  at 
home  with  an  ease  not  to  be  found  elsewhere. 

The  promoter  should,  however,  be  very  sure  that 
the  enterprise  presented  among  friends  is  a  sound  one. 
Friends  will  go  into  the  enterprise  largely  because  of 
their  confidence  in  the  promoter.  They  do  not  scruti- 
nize his  offering  so  closely  as  that  of  a  stranger,  they 
invest  more  freely,  and  naturally  they  demand  a  special 
consideration  and  protection  not  accorded  to  those 
actuated  purely  by  business  motives.  Then,  if  the 
enterprise  is  not  a  success,  these  friends  feel  that  their 
confidence   has   been   abused,    and    display   but   little 

314 


PRIVATE   PRESENTATION.  315 

charity  for  the  promoter.  If  in  addition  it  turns  out 
that  the  enterprise  was  not  even  an  ordinarily  sound 
one,  but  involved  more  than  the  usual  business  risk, 
the  promoter's  position  is  indeed  unhappy.  Not  only 
will  his  business  standing  be  afifected,  but  his  social 
relations  as  well,  and  unpleasant  suggestions  of  im- 
proper management  or  even  of  fraud  may  be  whispered 
about. 

The  conditions  are,  of  course,  different  when  the 
promoter's  friends  go  in  with  a  full  understanding 
and  express  recognition  of  the  risks  involved.  In  that 
case  they  have  no  real  ground  for  complaint  in  case 
of  failure.  Even  then,  however,  there  will  be  trouble. 
The  promoter  cannot  perhaps  be  openly  blamed,  but 
his  judgment  is  discredited,  his  business  standing  is 
injured,  and  the  general  effect  is  far  from  good. 

An  unsuccessful  enterprise,  it  is  true,  is  liable  to 
make  trouble  for  its  promoter,  no  matter  whether 
floated  among  friends  or  strangers.  Among  strangers, 
however,  failure,  while  still  unfortunate,  is  neither  so 
unpleasant  from  a  personal  standpoint  nor  so  injuri- 
ous from  a  business  point  of  view.  Among  friends 
it  may  perhaps  involve  the  promoter's  whole  business 
career.  Among  strangers  it  certainly  does  not  en- 
hance his  reputation  and  prospects,  but  it  is  not  apt 
to  be  so  disastrous.  Strangers  expect  fair  dealing, 
but  nothing  more,  and  in  case  of  failure  the  promoter 
will  meet  with  a  much  fairer  and  more  dispassionate 
judgment  among  these  strangers  than  he  would  among 
his  own  friends,  and — provided  only  that  it  is  an 
honest  failure — can  retrieve  it  more  quickly. 

Also  it  is  to  be  borne  in  mind  that  the  supply  of 


3l6  FINANCING    AN    ENTERPRISE. 

friends  is  limited,  while  the  reserve  of  strangers  is 
inexhaustible.  Therefore,  if  any  risks  beyond  the 
ordinary  are  to  be  taken,  it  had  usually  best  be  among 
these  strangers  where  the  loss  of  a  few  or  even  a  score 
from  among  the  promoter's  clientele  is  a  matter  of 
no  great  moment,  and  where  a  failure  is  not  so  far- 
reaching  in  its  consequences. 

Financing  among  friends,  if  the  conditions  are  right, 
is  of  the  easiest  possible.  The  enterprise  must  be 
suitable,  the  proposition  fair,  the  friends  must  have 
money  to  invest,  and  the  promoter  possess  their  con- 
fidence. Given  these  conditions  and  the  promoter  may 
go  quietly  round  among  a  few  of  these  friends,  pre- 
sent the  matter  to  them  and  get  his  money.  A  pencil 
and  a  few  scraps  of  paper  take  the  place  of  a  pros- 
pectus; the  personal  argument  does  the  rest.  The 
usual  difficulties  of  financing  do  not  exist. 

For  instance,  the  captain  of  a  New  York  harbor 
towboat  sees  a  chance  to  buy  a  tug  and  start  in  busi- 
ness for  himself.  He  lacks  a  few  thousand  dollars 
of  the  amount  required  and  undertakes  to  raise  this 
money  among  his  friends.  He  is  known  by  these 
friends  as  an  honest  man  and  a  safe  and  successful 
captain.  His  campaign  for  capital  is  simple.  He 
usually  has  a  shrewd  suspicion  as  to  where  his  money 
may  be  found.  After  supper  some  fine  evening  he 
lights  his  pipe,  puts  on  his  hat  and  goes  after  it.  A 
brief  explanation,  a  few  pertinent  figures  and  state- 
ments, and  a  very  simple  proposition  constitute  the 
entire  presentation.  A  few  friendly  calls  will  probably 
give  him  all  the  money  he  requires. 

The    same   easy-going  method    is    much    more  fre- 


PRIVATE    PRESENTATION.  317 

quent  than  would  be  supposed  in  the  circles  of  "high 
finance."  Not  uncommonly  some  "captain  of  indus- 
try" or  other  man  of  business  rated  up  in  the  hundreds 
of  thousands  or  millions  perhaps,  will  take  up  an  at- 
tractive enterprise,  and  with  nothing  more  elaborate 
than  a  lead  pencil,  a  note  book  and  the  natural  advan- 
tages of  his  position  will,  in  a  few  hours'  time,  finance 
it  among  his  business  associates  to  the  extent  of  tens 
and  even  hundreds  of  thousands  of  dollars.  Occa- 
sionally the  formality  of  a  personal  visit  is  dispensed 
with  and  the  whole  matter  is  settled  over  the  telephone, 
the  promoter  not  even  leaving  his  office.  Legal  as- 
sistance, formal  adjustments,  and  well-drawn  contracts 
may  later  conclude  and  fix  the  negotiations,  but  the 
matter  is  settled  for  all  practical  purposes  before  these 
formalities  are  reached. 

To  illustrate  the  general  ease  of  securing  money 
among  friends  when  the  conditions  are  favorable,  the 
case  of  a  young  and  very  successful  firm  of  neckwear 
manufacturers  may  be  instanced,  who  some  years  since 
incorporated  their  business.  There  were  but  two  in 
the  firm,  and  while  they  did  not  need  more  money 
in  the  business,  they  did  need  another  incorporator 
in  order  to  comply  with  the  requirements  of  the  law. 
A  friend  was  asked  to  act  and  willingly  agreed.  The 
two  parties  thereupon  not  only  made  this  friend  pay 
the  full  par  value  of  the  few  shares  of  stock  which, 
as  an  incorporator,  they  were  forced  to  let  him  take, 
but  absolutely  refused  his  rather  urgent  request  for 
a  larger  allotment.  They  could  have  secured  any 
reasonable  amount  of  money  from  him  and  from  other 
friends  for  the  mere  asking. 


3l8  FINANCING   AN    ENTERPRISE. 

Offhand  financing  such  as  instanced  is  not  uncom- 
mon and  it  may  be  laid  down  broadly  that  when  a 
good  business  man  presents  a  meritorious  enterprise 
to  friends  who  are  in  a  position  to  invest,  he  will,  if 
his  proposition  is  fair,  get  all  the  money  he  needs. 
These  are  the  most  favorable  conditions  for  financing, 
and  just  as  they  are  departed  from,  so  does  the  diffi- 
culty of  financing  increase. 

Usually  some  of  these  conditions  are  lacking,  or 
exist  only  in  incomplete  form.  Possibly  the  promoter 
himself  may  not  be  looked  upon  with  entire  confidence. 
Possibly  he  may  have  the  complete  confidence  of  his 
friends,  but  the  enterprise  will  be  looked  upon  with 
doubt.  Possibly  both  the  promoter  and  the  enterprise 
are  all  right,  but  the  stringency  of  the  money  markets 
makes  financing  for  the  time  impossible,  or  perhaps 
the  financial  condition  of  the  particular  friends  is  such 
as  to  make  it  inadvisable  for  them  to  invest. 

If  the  party  himself  is  an  obstacle,  either  on  account 
of  his  personal  character  or  because  of  his  doubtful 
or  unproved  business  ability,  the  situation  is  difficult. 
Then,  if  the  enterprise  is  to  be  financed  among  those 
who  know  him,  the  promoter  must  resign  himself  to 
the  loss  of  its  control,  placing  its  management  in  the 
hands  of  men  who  command  the  trust  his  acquaint- 
ances refuse  him,  or  else  must  place  this  control  di- 
rectly in  the  hands  of  the  acquaintances  themselves 
so  as  to  insure  them  against  any  mismanagement  or 
improper  management  on  his  part. 

If  the  enterprise  itself  is  looked  upon  with  doubt, 
the  promoter's  ingenuity  will  be  taxed  to  remove  the 
unfavorable  impression.     He  must  then  be  prepared 


PRIVATE  PRESENTATION.  319 

to  demonstrate  the  safety,  the  suitabiHty  and  the  profit- 
able nature  of  his  enterprise.  Knowing  the  situation 
he  should  be  able  to  do  this  with  more  or  less  con- 
clusiveness. If  he  cannot,  the  enterprise  is  not  one 
that  he  should  have  presented  to  friends  at  all. 

If  the  difficulties  in  the  way  are  financial,  the  pro- 
moter will  be  governed  by  conditions.  If  the  parties 
approached  actually  have  no  money  to  invest,  the 
matter,  of  course,  ends  right  there  as  far  as  they  are 
concerned.  If  it  is  merely  that  the  times  are  hard 
and  the  parties  appealed  to  are  doubtful  whether  they 
can  spare  money  for  investment,  it  then  becomes  a 
matter  of  presenting  the  enterprise  so  persuasively  that 
their  reluctance  shall  be  overcome,  or  of  delaying  its 
financing  until  times  are  better,  or  of  approaching 
other  people. 

The  method,  when  presenting  an  enterprise  among 
friends,  will  vary  greatly  with  the  conditions.  Natu- 
rally, other  things  being  equal,  the  immediate  friends 
of  the  promoter  will  be  approached  first.  If  the  enter- 
prise be  in  a  line  of  business  with  which  they  are 
familiar,  probably  no  prospectus  will  be  required,  a 
brief  written  or  even  verbal  statement  of  the  enter- 
prise, showing  its  condition  and  the  amounts  involved, 
answering  all  requirements.  As  the  circle  widens, 
however,  and  the  presentation  is  made  to  more  remote 
friends  and  acquaintances,  more  formality  must  be 
observed,  until  finally  the  ordinary  presentation  is 
reached,  with  its  prospectuses,  estimates,  statements, 
etc.,  etc. 

Usually  when  an  enterprise  is  presented  to  friends. 
if  these  latter  are  not  able  or  do  not  care  to  invest, 


320  FINANCING   AN    ENTERPRISE. 

or  are  unable  to  contribute  the  full  amount  them- 
selves, they  will  suggest  or  introduce  friends  of  theirs 
who  are  likely  to  be  interested.  In  this  case  the  "basis 
of  confidence"  possessed  by  the  introducing  friend  is 
transferred  to  and  enjoyed  by  the  promoter,  and  he 
can  work  amongst  these  friends  of  his  friends — who 
are  now  his — to  almost  the  same  advantage  that  he 
can  among  his  own  personal  associates.  Or  friends 
may  act  directly  as  agents  for  the  promoter  and  get 
money  for  him,  perhaps  from  a  merely  friendly  in- 
terest or  perhaps  to  earn  a  commission.  Either  motive 
is  proper  and  entirely  legitimate. 

Frequently  in  the  presentation  of  an  enterprise  at 
home,  local  personal  pride  or  interest  may  be  appealed 
to  with  much  effectiveness.  If  the  place  be  a  small 
one  and  the  enterprise  of  importance  to  it,  as  a  local 
sawmill,  a  foundry,  a  newspaper  or  an  opera  house, 
the  advantages  accruing  to  the  town  from  its  estab- 
lishment may  be  used  as  arguments  for  subscription. 
Possibly  the  matter  is  one  of  convenience  to  the  resi- 
dents, or  something  that  will  attract  new  residents, 
or  perhaps  place  the  town  ahead  of  some  neighboring 
and  competing  village,  or  it  may  be  that  it  merely 
advances  the  general  importance  and  prosperity  of  the 
place.  Any  or  all  of  these  facts  may  be  used  as  legiti- 
mate and  effective  means  for  securing  funds.  The 
field  is  one  that  offers  much  scope  for  ingenuity,  not 
only  in  the  discovery  of  advantages  to  be  derived  from 
the  proposed  enterprise  and  the  use  of  these  dis- 
coveries as  a  means  of  securing  subscriptions,  but  also 
in  the  disposal  of  objections  that  will  almost  certainly 
arise. 


PRIVATE   PRESENTATION.  32  I 

For  instance,  a  sanitarium  may  be  proposed  by  the 
local  physician  of  some  healthful  mountain  village. 
The  establishment  of  such  an  enterprise  will  bring 
numerous  patients,  who  are  generally  people  of  means, 
to  the  sanitarium.  Supplies  will  be  purchased  in  the 
town,  work  will  be  provided  in  the  erection  of  the 
buildings,  employment  will  be  afforded  for  the  in- 
habitants in  and  about  the  sanitarium.  Also  frequent- 
ly the  patients  will  be  accompanied  by  friends  who 
must  take  up  their  residence  in  the  village,  and  the 
money  brought  in  by  the  patients  and  their  friends 
will  add  materially  to  the  prosperity  of  the  place.  All 
these  facts  are  material  and  important  and  should  be 
strong  arguments  in  a  campaign  for  local  subscriptions 
to  the  enterprise. 

On  the  other  hand,  opposition  to  the  plan  may 
develop  on  the  part  of  property  holders  who  fear  that 
the  presence  of  the  invalids  at  the  sanitarium  and  their 
travelling  to  and  from  the  village  may  have  a  very 
harmful  influence  on  the  price  of  realty  and  tend  to 
check  the  growth  and  reputation  of  the  place.  This 
is  at  times  a  very  real  and  serious  objection,  particu- 
larly if  the  sanitarium  were  for  patients  suffering 
from  tuberculosis,  and  could  only  be  overcome  by 
tactful  work  on  the  part  of  the  promoter.  He  might 
show  in  the  first  place  that  the  possible  injury  from 
this  source  was  greatly  overestimated,  that  the  loca- 
tion selected  for  the  sanitarium  was  too  far  from 
the  village  for  it  to  have  any  direct  effect,  and  that 
the  sanitarium  could  have  a  name  of  its  own  to  more 
effectually  separate  it  from  the  village,  and  finally  that 
the  possible  dangers  were  completely  overbalanced  by 


322  FINANCING   AN    ENTERPRISE. 

the  advantages  that  would  accrue  from  the  estabHsh- 
ment  of  the  sanitarium  as  proposed. 

If  the  enterprise  appeals  to  or  will  benefit  any  par- 
ticular industry  or  line  of  business,  that  fact  may  be 
used  to  advantage.  If  a  bank  is  to  be  started,  the 
merchants  and  manufacturers  of  the  place  who  will 
find  the  bank  a  convenience  should  be  easily  induced 
to  render  it  their  support.  Or  if  a  coal  mine  is  to 
be  opened,  the  local  railroad  which  will  benefit  by  its 
shipments  may  possibly  be  induced  to  assist — not  in 
the  very  dubious  way  that  seems  to  prevail  with  some 
of  the  great  coal  roads  of  the  East,  but  on  the  basis 
of  good  hard  cash  subscriptions,  or  perhaps  in  the 
way  of  sidings  or  other  shipping  facilities.  Or  fre- 
quently a  banker  will  subscribe  to  an  enterprise  which 
promises  deposits  for  his  bank.  Or  if  a  grain  elevator 
is  to  be  established,  the  farmers  of  the  neighborhood 
who  will  advantage  by  its  erection  may  be  interested. 
Or  a  creamery  which  opens  a  new  market  for  their 
milk  will  appeal  very  strongly  to  these  same  farmers, 
and  on  any  reasonable  basis  will  almost  invariably 
receive  their  support. 

This  should  also  be  the  case  with  distilleries  for 
the  production  of  denaturized  alcohol.  The  plants  for 
the  production  and  preparation  of  this  alcohol  demand 
too  large  an  investment  to  be  within  reach  of  the 
individual  farmer.  They  are,  however,  easily  possible 
by  co-operative  effort,  and  open  a  new  and  very  profit- 
able avenue  for  the  disposal  of  large  quantities  of  the 
farm  products,  which  are  now  of  but  little  if  any 
value. 

Also  very  frequently  the  offer  to  some  special  person 


PRIVATE   PRESENTATION.  323 

of  a  position  in  the  new  enterprise  will  be  a  potent 
means  of  securing  contributions.  This  should  not, 
of  course,  be  done  to  the  injury  of  the  enterprise  by 
the  installation  of  inefficient  officials,  but  properly  used, 
is  a  strong  and  legitimate  inducement  for  either  direct 
or  indirect  subscriptions.  If  a  desirable  opening  is 
offered  a  young  man  who  is  looking  for  a  position, 
or  who  wishes  to  better  a  position  already  held,  the 
offer  being  conditioned  on  a  subscription  of  some  fixed 
amount  to  the  enterprise,  the  subscription — if  the  con- 
ditions are  at  all  favorable  and  the  amount  within 
reason — is  very  apt  to  be  forthcoming.  If  the  young 
man  cannot  subscribe  himself,  he  will  convert  himself 
with  much  promptness  into  a  very  active  and  inter- 
ested agent  of  the  enterprise,  and  some  relative  or 
friend  can  usually  be  found  to  help  both  the  young 
man  and  the  enterprise  by  making  the  requisite  sub- 
scription. Or  the  assistance  of  an  influential  man  can 
sometimes  be  secured  by  the  offer  of  a  position,  such 
as  the  presidency  or  treasurership,  or  some  other  ad- 
vantageous connection  with  the  new  enterprise.  Con- 
versely, the  mere  effect  of  having  some  specially 
prominent,  able  or  influential  man  connected  with  the 
enterprise  is  at  times  of  sufficient  importance  to  justify 
the  offer  of  a  remunerative  or  advantageous  position. 
Such  men  give  solidity  to  the  undertaking,  create 
confidence  in  its  future  and  are  a  material  aid  in  secur- 
ing subscriptions.  The  general  idea  is  capable  of  many 
variations  and  is  much  employed  in  practice. 

In  any  presentation  of  the  kind  among  people  who 
are  acquainted,  the  effect  of  good  fellowship  and  of 
the   desire   to   go    with    the    crowd    cannot   be   over- 


324  FINANCING   AN   ENTERPRISE. 

estimated.  The  idea  should  be  emphasized  as  strongly 
as  possible  that  all  are  going  in  on  the  ground  floor 
together,  and  that  the  opportunity  of  getting  in  with 
the  rest  should  not  be  missed. 

Enterprises  of  very  modest  merit  are  not  infrequent- 
ly financed  almost  solely  on  this  basis.  John  Jones 
may  not  have  the  faintest  intention  or  desire  of  taking 
part  in  the  organization  of  a  bank  or  a  building 
association,  or  a  factory,  or  a  gun  club.  If,  however, 
some  of  his  friends  are  going  in  and  the  fact  is  prop- 
erly brought  to  his  attention,  in  nine  cases  out  of  ten, 
in  the  absence  of  some  material  reason  for  not  doing 
so,  he  will  join  the  movement.  This  is  especially  true 
when  those  who  are  going  in  are  particular  friends, 
or  people  whom  he  admires  or  respects. 

Sometimes  when  working  along  these  lines  the 
financing  of  an  entire  enterprise  will  hang  on  the 
possibility  of  getting  someone  to  make  a  start.  Those 
approached  may  want  to  go  in,  but  dislike  to  take 
the  lead,  or  perhaps  they  are  uncertain,  or  even  may 
not  want  to  go  in  at  all.  If,  however,  anyone  can  be 
induced  to  make  the  initial  "break"  the  rest  will  follow. 
Then  the  critical  point  is  to  secure  the  first  subscrip- 
tion. This  sometimes  gives  room  for  the  display  of 
much  ingenuity  on  the  part  of  those  in  charge  of  the 
enterprise. 

In  a  case  in  point  in  the  writer's  experience,  pro- 
moters were  trying  to  raise  money  among  their  friends 
to  develop  a  deposit  of  asphalt  supposed  to  be  very 
valuable  for  varnish  making.  The  friends  approached 
hesitated  because  of  their  ignorance  of  the  industry 
and  more  particularly  because  the  varnish  value  of  the 


PRIVATE  PRESENTATION.  325 

asphalt  in  question  had  not  been  demonstrated  on  a 
commercial  scale. 

The  promoters  worked  with  much  persistence,  but 
it  seemed  impossible  to  get  the  matter  started.  Finally 
one  of  the  gentlemen  appealed  to,  put  the  matter  con- 
cretely. "I  don't  know  that  your  asphalt  will  make 
varnish.  I  believe  that  the  stuff  is  in  the  deposit,  that 
it  is  there  in  sufficient  quantity,  and  that  you  can  get 
it  out  profitably,  provided  it  is  of  the  proper  quality 
to  make  varnish  and  will  command  the  prices  you 
claim,  but  this  has  not  been  proved.  Now  show  me 
an  order  from  some  varnish  establishment  for  a  car- 
load of  the  stuff  and  I  will  put  in  a  thousand  dollars." 

The  problem  then  presented  to  the  promoters  was 
a  difficult  one.  The  varnish  makers  of  the  country 
had  their  own  sources  of  supply,  and  much  preferred 
that  others  should  not  be  opened.  They  could  not, 
therefore,  be  looked  to  for  assistance.  No  other  manu- 
facturers would  use  varnish  asphalt  in  such  quantity. 
Nothing  daunted,  however,  the  promoters  took  coun- 
sel together  and  after  due  consideration  set  to  work 
to  organize  a  varnish  company.  The  capitalization 
of  this  little  company  was  modest,  but  the  promoters 
were  quite  successful  in  securing  subscriptions  for  its 
stock,  and  as  soon  as  the  new  company  was  sufficiently 
far  enough  along  to  begin  operations,  its  first  business 
transaction  was  to  give  the  promoters  an  order  for  a 
carload  of  asphalt.  The  promoters  came  back  to  the 
gentleman  with  this  requisition.  While  it  is  somewhat 
doubtful  whether  the  order  fully  met  the  spirit  of  the 
gentleman's  demands,  it  did  secure  his  subscription. 
Other  friends  joined  in  and  the  amount  desired  for 
the  development  of  the  deposit  was  secured. 


326  FINANCING   AN    ENTERPRISE. 

Frequently  money  for  an  enterprise  can  be  obtained 
in  a  neighborhood  by  an  even  more  direct  use  of  the 
co-operative  idea.  Say  a  sawmill  is  to  be  started  and 
the  sum  of  five  thousand  dollars  is  required  for  the 
installation.  The  parties  in  charge  of  the  enterprise 
thereupon  start  in  to  get  ten  men  to  put  in  $500  each. 
The  fixing  of  a  definite  sum  and  the  community  and 
equality  of  interest  thus  established  appeals  strongly 
to  those  approached,  and  very  frequently  carries  the 
day  when  it  could  not  be  carried  on  any  other  basis. 

It  is  hardly  necessary  to  say  that  in  a  friendly  pre- 
sentation of  the  kind  here  considered,  a  very  full 
exhibit  of  the  enterprise  is  nearly  always  advisable. 
Its  soundness,  its  suitability,  the  advantages  to  the 
town,  its  reasonable  profits,  its  speculative  possibilities, 
the  absence  of  risk — all  these  must  be  brought  out 
strongly  and  fully.  Also  if  such  is  the  case,  the  fact 
that  small  salaries  are  to  be  paid  until  a  dividend  basis 
is  reached  and  the  general  idea  that  no  one  derives 
any  profits  till  profits  are  made  for  all,  may  be  used 
to  much  advantage. 

In  addition  to  this,  it  is  also  desirable,  though  not 
always  advisable,  to  show  exactly  how  the  promoter 
comes  into  the  enterprise.  If  he  is  bearing  the  heat 
and  burden  of  the  day  solely  for  the  good  of  the 
enterprise,  that  fact  should  be  clearly  understood.  If 
he  is  putting  in  his  money  on  just  the  same  basis  as 
the  others,  without  any  profits  or  advantages  that  the 
others  do  not  enjoy,  these  conditions  should  be  known. 
If,  however,  he  is  to  receive  any  special  profit,  payment 
or  other  consideration,  the  fact  should  usually  be 
stated.     Certainly  it  should  never  be  concealed. 


PRIVATE  PRESENTATION.  327 

Possibly  the  promoter  may  be  working  for  some 
position  in  the  enterprise.  If  so,  the  motive  is  entirely 
legitimate  and,  if  he  be  suitable  for  the  position,  should 
not  be  objectionable  to  his  friends.  Or  perhaps  his 
profits  are  indirect,  as  where  a  hotel,  a  sawmill  or  a 
creamery  to  be  established  will  open  up  a  profitable 
market  for  his  wares  or  products.  Or  perhaps  some 
property  of  his  is  to  be  taken  over  by  the  new  enter- 
prise. Or  perhaps  he  is  to  receive  a  stock  or  even  a 
cash  commission  for  his  services.  Whatever  the  profit 
or  motive,  it  should  be  known.  To  conceal  from 
friends  the  fact  that  a  profit  is  being  made  is  the  height 
of  folly.  Sooner  or  later  the  matter  is  almost  sure  to 
be  discovered,  and  may  perhaps  result  in  a  very  serious 
discrediting  of  the  promoter.  Promoters'  profits,  if 
reasonable,  are  well  earned  and  entirely  justifiable. 
If,  however,  they  are  concealed  at  first  and  are  then 
later  discovered,  the  proceeding  bears  an  air  of  trickery 
and  underhandedness  very  hard  to  dissipate. 

In  many  cases,  and  perhaps  most  cases,  if  the  pro- 
moter's profits  be  reasonable  and  the  matter  be  tact- 
fully handled,  no  objections  to  these  profits  will  be 
made.  At  times,  however,  it  must  be  confessed,  most 
unreasonable  antagonism  is  aroused.  Then  all  the 
promoter's  tact  and  ability  will  be  required  to  carry 
the  matter  through  successfully.  Possibly  if  opposi- 
tion is  anticipated  the  promoter,  while  admitting 
profits,  if  the  matter  comes  up,  will  not  acquaint  his 
friends  with  the  amount  of  these  personal  profits. 
He  is  under  no  obligation,  either  moral  or  legal,  to 
do  so.  Or,  if  he  deems  best,  he  may  refuse  absolutely 
to  give  any  information.     He  is  well  within  his  rights 


328  FINANCING   AN    ENTERPRISE. 

in  so  doing.  What  he  must  guard  against  is  the 
representation,  either  expressed  or  impHed,  that  he  is 
not  making  profits.  Any  such  misrepresentation  is 
not  only  bad  faith  but  might  make  the  promoter 
legally  liable  to  his  associates  for  his  profits.  The 
general  subject  of  promoter's  profits  has  been  already 
treated  in  a  preceding  chapter — Chapter  XXIV,  "Man- 
ner and  Matter  of  Presentation."  All  that  is  said 
there  applies  even  more  strongly  when  the  transactions 
are  among  friends. 


CHAPTER  XXX. 

PRIVATE  PRESENTATION. 
Among  Strangers. 


As  already  stated,  when  the  conditions  are  right  a 
good  enterprise  is  best  presented  and  financed  among 
friends  or  acquaintances  of  the  promoter.  It  some- 
times happens,  however,  that  the  conditions  are  not 
right  and  appHcation  must  then  be  made  to  strangers. 

Occasionally,  for  instance,  a  young  and  inexperi- 
enced man  will  fail  to  finance  a  good  enterprise  among 
his  friends  merely  because  they  look  upon  him  as  still 
a  boy  and  are  afraid  to  trust  his  untried  business 
judgment.  Or  perhaps  the  promoter  has  been  un- 
successful in  some  other  enterprise  financed  among  his 
friends  and  on  that  account  alone  fails  to  secure  his 
money.  Or  again,  he  may  be  entirely  successful  in 
his  own  line  of  business,  but  the  enterprise  in  question 
may  be  outside  this  line,  or  possibly  on  a  much  larger 
scale,  and  fail  because  his  friends'  confidence  does  not 
extend  so  far. 

Or  sometimes  a  home  financing  will  fail  because  of 
the  absolute  familiarity  of  the  promoter  or  of  the 
enterprise  to  the  residents.  A  town  boy  will  make 
some  important  discovery  and  appeal  to  his  elders  for 
money  for  its  development.  They  have  known  "J^ck" 
or  "Bill,"  as  the  case  may  be,   all  their  lives,  have 

329 


330  FINANCING   AN    ENTERPRISE. 

never  seen  anything  unusual  about  him,  and  therefore 
do  not  beheve  in  his  invention.  If,  then,  it  is  to  be 
financed,  it  must  be  taken  among  strangers  who  will 
base  their  opinions  on  the  merits  of  the  invention,  not 
on  their  knowledge  of  the  inventor. 

Or  perhaps  some  village  resident  of  a  utilitarian 
turn  of  mind  will  discover  that  a  well-known  ledge  of 
rock  is  a  fine  building  stone  requiring  only  develop- 
ment to  make  a  most  valuable  quarry.  The  ledge  has 
been  familiar  to  the  people  of  the  vicinity  for  genera- 
tions. Stone  is  probably  overplentiful  in  the  neigh- 
borhood, anyway,  and  the  idea  that  the  particular 
ledge  is  any  better  or  more  valuable  than  the  moun- 
tains of  stone  around  it  strikes  them  as  absurd.  The 
new  quarry  must  then  be  financed  elsewhere  if  at  all. 

Also,  certain  elements  of  suitability  must  enter  in, 
whether  the  enterprise  be  presented  among  friends  or 
strangers.  It  is  obvious,  for  instance,  that  the  enter- 
prise must  be  within  the  means  of  the  parties  ap- 
proached. A  shipyard,  a  rolling  mill  or  a  connecting 
railroad,  no  matter  how  desirable  or  how  profitable, 
could  not  be  financed  by  the  residents  of  a  little  fishing 
village  in  which  perhaps  the  wealthiest  inhabitant  is 
possessed  of  but  a  few  thousand  dollars.  The  enter- 
prise is  beyond  them,  and  the  large  aggregations  of 
capital  elsewhere  must  be  drawn  upon  if  it  is  to  be 
financed. 

Again,  an  enterprise  must  be  adapted  to  the  en- 
vironment of  the  people  to  whom  it  is  presented.  A 
plan  to  establish  a  shipyard  would  not  ordinarily  ap- 
peal to  the  people  of  an  inland  city,  nor  would  a  dry 
placer  process  for  recovering  gold  appeal  strongly  to 


PRIVATE  PRESENTATION.  33  I 

the  agriculturists  of  southern  New  Jersey.  Both  enter- 
prises might  be  highly  meritorious.  The  people  are 
not,  however,  familiar  with  the  conditions  which 
would  enable  them  to  judge,  and,  the  operations  of 
the  enterprises  being  far  distant,  they  would  have  no 
confidence  in  the  enterprises  and  would  not  invest  their 
money. 

Or  again,  as  a  rule,  an  enterprise  that  may  only  be 
used  to  advantage  in  connection  with  some  special 
business  or  industry,  must  be  taken  to  that  business 
or  industry,  or  to  people  familiar  with  it,  for  financing. 
For  instance,  an  improved  method  of  canning  meats, 
though  of  admitted  value,  could  hardly  be  financed  in 
a  western  mining  town.  Neither  would  the  same  peo- 
ple be  interested  in  a  mechanism  for  weaving  carpets, 
nor  a  new  method  of  decorating  tiles,  nor  even  in  an 
improved  drop  forge,  no  matter  how  valuable  the 
underlying  ideas  might  be. 

When  the  conditions  are  such  that  the  enterprise 
must  be  financed  outside  the  circle  of  the  promoter's 
own  friends,  it  is  to  be  hoped  that  the  presentation 
can  be  made  to  strangers  living  in  the  same  place  or 
the  same  part  of  the  country  as  the  promoter.  Tf  not, 
the  expense  and  difficulties  of  the  work  are  usually 
greatly  increased. 

This  is,  however,  not  always  the  case.  Sometimes 
a  presentation  away  from  home  may  be  made  by  letter 
quite  as  advantageously  as  in  person  and  sometimes 
even  more  so,  and  then  the  expense  and  trouble  are 
reduced  to  a  minimum. 

For  instance,  some  obscure  chemist  may  discover  a 
new  and  very  desirable  preservative  for  meat — some- 


332  FINANCING  AN    ENTERPRISE. 

thing  low  in  price,  easily  applied  and  entirely  unob- 
jectionable on  the  score  of  healthfulness.  Such  a  dis- 
covery would  be  of  very  great  value  and  ought  to  com- 
mand a  ready  reception  and  a  liberal  price.  It  would, 
however,  appeal  directly  to  but  a  limited  class  of  people, 
and  the  most  important  of  these  would  be  the  great 
packers.  Obviously,  then,  application  should  be  made 
to  them  first  of  all.  If,  however,  the  discoverer  went 
in  person  to  Chicago,  Kansas  City,  or  any  other  pack- 
ing center,  he  would  find  the  great  packers  busy  men, 
and,  unless  suitably  introduced  or  favored  by  fortune, 
would  hardly  get  further  in  his  quest  than  an  outer 
office  and  an  interview  with  a  minor  and  entirely  in- 
adequate packing  house  official.  He  might  not  even 
get  past  the  office  boy,  and  should  he  by  some  means 
reach  one  of  the  principals,  it  would  usually  only  re- 
sult in  a  reference  to  some  one  else  in  whose  depart- 
ment the  matter  lay. 

In  any  such  case  application  by  letter  would  be 
preferable.  The  discovery  would  be  an  important  one 
for  the  packers  and  short,  concise  letters  addressed 
to  the  managers  of  the  various  large  packing  houses, 
or  even  addressed  to  the  concerns,  would  be  referred 
to  the  proper  parties  and  in  almost  every  case  would 
receive  quick  and  sufficient  attention.  If  not  interest- 
ing to  the  packers,  the  matter  would  be  turned  down 
with  much  promptness,  but  also  usually  with  all  due 
courtesy.  If  of  interest,  the  letter  would  probably 
lead  either  to  an  invitation  to  visit  the  parties  writing, 
or  to  a  visit  from  a  representative  of  the  particular 
packer.  In  either  case  the  discoverer  would  secure 
his  interview  at  a  minimum  of  expense  and  on  a  most 
favorable  basis. 


PRIVATE  PRESENTATION.  333 

In  some  cases  a  matter  of  the  kind  may  be  consum- 
mated entirely  by  correspondence  without  the  necessity 
of  other  personal  action.  For  instance,  an  inventor 
recently  devised  a  new  and,  as  he  believed,  an  improved 
shoe-lace.  Such  an  invention  might  perhaps  be  de- 
veloped as  an  independent  enterprise,  the  lace  being 
manufactured  and  sold  to  the  shoe  dealers.  In  the 
present  instance,  however,  the  invention  could  be 
handled  to  better  advantage  through  some  one  of  the 
great  shoe  manufacturers  and  the  inventor  therefore 
decided  to  present  the  matter  to  them.  It  was  then 
necessary  to  bring  the  lace  to  their  notice.  A  personal 
visit  to  each  of  the  prominent  shoe  manufacturers  of 
the  country  would  have  involved  more  expense  than 
the  inventor  could  afford.  Also  a  matter  so  directly 
applicable  to  the  business  in  which  a  man  is  engaged 
will  usually  secure  consideration  without  the  personal 
element  ordinarily  necessary  in  financing.  In  the  case 
considered  it  is  not  probable  that  a  visit  from  the 
inventor  would  have  been  as  effective  as  correspond- 
ence. Certainly  it  would  not  for  the  first  presentation. 
Letters  were  therefore  written,  samples  were  sent,  and, 
it  must  be  admitted,  the  results  were  disappointing.  If, 
however,  the  lace  had  been  worth  adopting,  it  is  almost 
certain  that  his  letters  would  have  led  to  business.  As 
it  was,  the  matter  was  turned  down  with  the  least  pos- 
sible expense  and  trouble  to  the  inventor. 

In  preparing  for  the  presentation  of  any  such  matter 
by  correspondence,  it  should  be  borne  in  mind  that  the 
parties  appealed  to  are  usually  experts  in  their  lines 
and  that  a  lengthy  dissertation  on  the  merits,  the  ap- 
plication and  the  advantages  of  the  new  invention  is 


334  FINANCING   AN    ENTERPRISE. 

not  necessary.  Business  men  are,  it  is  true,  occasion- 
ally obtuse  as  to  their  general  interests — as  in  the  oft 
quoted  case  when  the  Bell  telephone  and  its  stock 
went  begging  at  prices  now  hardly  credible — but  as  a 
rule  they  are  quick  to  see  the  advantages  of  anything 
particularly  applying  to  their  own  line  of  business. 
In  the  case  of  the  shoe-lace,  it  would  be  entirely 
superfluous  to  go  into  the  merits  of  the  lace  in  detail, 
as  any  man  with  sufficient  business  ability  and  knowl- 
edge of  the  industry  to  be  at  the  head  of  a  large 
shoe  business  could  see  at  least  as  quickly  as  the  in- 
ventor himself  its  possible  applications.  The  letter 
then  should  state  as  briefly  as  a  clear  presentation  will 
permit,  just  what  the  invention  is,  what  it  does,  what 
the  inventor  wants  done,  and  nothing  more.  The 
inventor  might  perhaps  not  see  fit  to  make  any  propo- 
sition or  discuss  terms  in  this  first  letter  at  all,  leaving 
the  matter  open  for  future  adjustment  if  his  corre- 
spondent is  interested.  Presentation  by  letter  is  dis- 
cussed further  in  the  chapter  which  follows. 

When  an  enterprise  must  be  presented  away  from 
home  and  correspondence  is  inadequate,  the  promoter 
must  usually  of  necessity  take  it  himself.  If  he  has 
friends  who  will  present  the  matter  for  him,  either 
for  the  sake  of  friendship  or  for  a  share  of  the  profits, 
the  arrangement  may  be  highly  desirable.  As  a  gen- 
eral rule,  however,  the  owner  of  an  enterprise  cannot 
safely  place  it  in  the  hands  of  others  for  presentation, 
and  more  particularly  when  this  presentation  is  to 
be  made  in  some  place  too  distant  for  his  personal 
supervision. 

The    general    problems    encountered    in    financing 


PRIVATE    PRESENTATION.  335 

among  strangers  are  the  same  without  regard  to  loca- 
tion. It  will  therefore  be  assumed  for  the  purposes 
of  the  present  consideration  that  the  promoter,  having 
found  it  impossible  to  finance  his  enterprise  at  home, 
has  selected  New  York  as  the  city  in  which  it  is  to 
be  presented. 

The  first  suggestion  to  anyone  intending  to  present 
an  enterprise  in  New  York  City  is  in  line  with  lago's 
sage  advice,  "Put  money  in  thy  purse."  The  financial 
centers  are  exceedingly  expensive  places  in  which  to 
live  and  do  business,  and  while  the  enterprise  may  be 
financed  quickly,  it  usually  is  not.  There  are  brilliant 
exceptions,  but  the  general  experience  of  enterprises 
brought  to  New  York  for  financing  is  one  of  con- 
tinued and  discouraging  delay. 

As  a  matter  of  fact,  any  sound  business  enterprise 
of  riierit,  if  at  all  suitable  in  its  character,  can  be 
financed  in  New  York  City.  Great  numbers  are 
financed  there  that  do  not  possess  even  these  element- 
ary requisites.  The  length  of  time  that  a  financing 
will  require  is,  however,  extremely  problematical.  If 
the  conditions  are  favorable,  if  the  right  parties  are 
encountered  promptly  and  the  matter  be  desirable, 
the  whole  thing  may  be  practically  arranged  in  the 
course  of  a  few  days  or  even  a  few  hours.  On  the 
other  hand,  months  and  even  years  may  be  required. 
In  one  case  well  known  to  the  author  an  enterprise 
of  merit  dragged  along  for  ten  years  and  has,  now, 
after  numerous  trying  vicissitudes,  but  just  come  in 
sight  of  the  coveted  goal. 

Because  of  this  uncertainty  and  because  an  enter- 
prise cannot  l)e  presented  to  advantage  when  the  pro- 


336  FINANCING   AN    ENTERPRISE. 

moter  is  suffering  from  a  personal  lack  of  money,  par- 
ties coming  to  New  York  for  the  purpose  of  financing 
enterprises  should  either  provide  sufficient  funds  for 
a  long  siege  or  else  arrange  for  and  execute  a  prompt 
retreat  when  the  funds  they  do  have  run  short. 

To  come  without  proper  financial  provision  is  not 
uncommon  among  a  certain  class  of  owners  or  pro- 
moters of  enterprises,  and  more  particularly  among 
inventors.  The  man  who  does  so  is  not  only  liable 
to  meet  with  humiliating  and  highly  disagreeable 
experiences,  but  is  also  heavily  handicapped  in  his 
work  from  the  start.  Success  under  such  circum- 
stances may  be  possible,  but  it  is  not  probable,  and 
the  unlucky  promoter — while  not  likely  to  lose  much, 
because  he  has  not  much  to  lose — will  almost  certainly 
find  that  he  has  come  on  a  fool's  errand. 

On  the  other  hand,  it  may  be  said  that  extravagant 
expenditures  are  not  in  any  way  essential  to  the 
financing  of  an  ordinary  deal  in  New  York  City.  In 
any  such  case  the  style  in  which  the  party  lives  while 
presenting  the  matter  cuts  but  little  figure.  If  some 
transcontinental  railroad  is  to  be  financed,  or  a  pack- 
ing house  combination  is  to  be  arranged,  or  some 
other  negotiation  involving  millions  of  actual  value 
is  to  be  consummated,  it  may  be  well  for  the  promoter 
to  put  up  at  the  Astoria,  the  Plaza,  the  St.  Regis, 
or  some  other  of  New  York's  expensive  hotels.  It 
will  be  expected.  Even  then,  however,  it  is  doubtful 
whether  his  negotiations  would  be  injuriously  affected 
in  any  way  if  the  promoter  disappointed  these  expec- 
tations by  adopting  a  less  expensive  mode  of  living. 

It  is  also  to  be  noted  that  but  little  financing  is 


PRIVATE  PRESENTATION,  2;^y 

done  in  these  days  by  means  of  wine  suppers  and  other 
costly  indulgences.  A  comfortable  little  dinner  for  a 
few  interested  parties  may  occasionally  be  very  help- 
ful in  closing  up  a  deal.  But  as  a  rule  nothing  more 
is  expected  or  desirable,  and  while  a  high-priced  hotel 
may  be  a  very  good  means  of  parting  the  promoter 
from  his  money,  it  is  not  at  all  necessary  to  the  success 
of  his  undertaking. 

In  all  such  matters,  speaking  generally,  the  people 
of  New  York  are  very  cosmopolitan,  and  so  long  as 
a  man  dresses  reasonably  well,  pays  his  bills  as  he 
goes,  and  does  not  try  to  negotiate  small  personal 
loans,  they  care  but  little  how  he  lives  when  not  in 
sight.  They  are  not  imposed  upon  or  even  favorably 
impressed  by  a  disregard  of  the  usual  economies,  nor 
are  they  unfavorably  impressed  or  discouraged  by 
their  observance.  If  they  wish  to  determine  the  pro- 
moter's financial  status,  they  consult  a  commercial 
agency  and  do  not  vex  themselves  as  to  his  mode  of 
living.  A  good,  comfortable  hotel  or  respectable 
boarding  house  will  therefore  afford  as  advantageous 
and  sound  a  basis  from  which  to  finance  any  ordinary 
deal  as  will  the  Plaza  or  the  Astoria. 

Of  course,  economy  in  this  direction  must  not  be 
carried  too  far.  It  is  doubtful,  for  instance,  whether 
any  one  of  the  numerous  promoters  who  frequent 
the  corridors  of  the  Mills'  hotels — where  comfortable 
accommodations  may  be  had  at  the  very  reasonable 
rate  of  twenty  cents  a  night — ever  financed  an  enter- 
prise of  importance.  Their  enterprises  are  not  always 
bad.  but  the  basic  conditions  are  too  unfavorable. 
Their  economy,  usually  enforced,  is  carried  to  an  ex- 


^^8  FINANCING    AN    ENTERPRISE. 

cess  which  prevents  business.  On  the  other  hand,  it 
is  a  fact  that  in  many  cases  enterprises  of  moderate 
magnitude  are  handicapped  and  seriously  injured  by 
the  unnecessary  and  somewhat  extravagant  expendi- 
tures of  their  promoters. 

In  this  general  connection  it  may  be  said  that  there 
is  very  frequently  an  impression  among  people  com- 
ing to  New  York  to  finance  enterprises  that  the  past 
history  and  present  standing  of  themselves  and  their 
enterprises,  save  as  revealed  by  them,  are  as  a  closed 
book  to  the  parties  they  approach.  This  is  not  by 
any  means  the  case.  On  the  contrary,  any  business 
man,  familiar  with  matters  of  the  kind,  will  look  up 
the  standing  of  the  parties  by  whom  an  enterprise  is 
presented,  and  the  status  of  the  enterprise  itself,  as  a 
mere  matter  of  course.  He  may  do  this  through  some 
commercial  agency,  or  through  his  bankers,  or  through 
private  sources.  However  this  may  be,  the  parties 
presenting  an  enterprise  may  feel  sure  that  it  will  be 
done,  and  thoroughly  done,  if  the  matter  is  of  im- 
portance, and  that  any  material  information  in  point 
relating  either  to  themselves  or  to  their  enterprise  will 
very  shortly  be  in  the  possession  of  the  parties  with 
whom  they  are  negotiating.  A  recognition  of  this 
fact  will,  on  occasion,  save  embarrassment  and  trou- 
ble. It  will  also  sometimes  explain  delays,  counter 
propositions,  or  even  an  emphatic  refusal  of  a  propo- 
sition, which  are  otherwise  puzzling. 


Financing  in  the  great  cities  is  a  difficult  under- 
taking. There  is  perhaps  more  money  available  in 
New  York  for  good  enterprises  than  in  any  other  city 


PRIVATE  PRESENTATION.  339 

of  the  world,  but  on  the  other  hand,  there  is  perhaps 
no  other  city  in  the  world  in  which  good  enterprises 
seeking  money  are  so  numerous.  Worse  than  this 
is  the  fact  that  there  are  so  many  enterprises  that 
are  not  good,  seeking  this  same  money.  Further,  men 
of  wealth  are  so  closely  pursued,  harassed  and  annoy- 
ed by  promoters  and  other  persistent  callers  with  de- 
signs on  their  time  and  money,  that  of  necessity  they 
hedge  themselves  about  with  outer  offices,  railings, 
office  boys,  secretaries,  personal  representatives  and 
other  protective  measures,  until  it  is  a  matter  of  great 
difficulty  to  even  obtain  access  to  them.  People  of 
moderate  means  are,  it  is  true,  much  more  accessible, 
but  even  here  difficulty  will  be  found  in  approaching 
them  on  a  favorable  basis.  The  promoter  should 
therefore  not  only  pave  the  way  in  advance  for  access 
to  the  people  he  must  meet,  or  wishes  to  meet,  but 
should  be  so  fully  prepared  in  every  way  that  when 
his  opportunity  does  come  he  may  avail  himself  of  it 
to  the  utmost. 

Particularly,  unless  the  promoter  has  friends  or 
good  business  connections  in  New  York,  should  he 
bring  letters  of  introduction  with  him,  as  the  condi- 
tion of  the  complete  stranger  attempting  to  finance 
an  enterprise  in  New  York  is  unhappy.  For  the  ordi- 
nary enterprise  these  letters  of  introduction  are  best 
to  men  of  moderate  means.  The  financial  magnates 
with  whom  some  sections  of  New  York  are  thronged 
have,  it  is  true,  money  to  the  point  of  oppressiveness, 
but  this  money  is  not  for  the  promoter  with  an 
ordinarv  enterprise,  and  he  need  waste  no  time  in 
plans  for  its  capture.     Of  course,  if  the  enterprise  is 


340  FINANCING  AN    ENTERPRISE. 

one  of  such  a  character  as  to  appeal  to  or  require  the 
assistance  of  the  great  financiers,  the  attack  must  be 
made  in  that  direction.  Otherwise  they  are  to  be 
avoided.  Such  men  have  so  many  undertakings  of 
importance  on  hand  and  so  many  are  constantly  being 
offered  them,  that  an  enterprise  that  does  not  appeal 
to  them  particularly  stands  no  show  for  even  a  pre- 
liminary consideration. 

Letters  of  introduction  then  are,  as  a  rule,  best  to 
men  of  moderate  wealth.  If  the  promoter  can  meet 
these  men  on  a  social  footing — at  their  homes,  their 
clubs,  their  country  houses,  at  Belmar,  Tuxedo  or 
Lakewood — it  is  very  advantageous,  giving  him  a 
chance  to  approach  them  in  an  informal  and  effective 
way  that  would  hardly  be  possible  in  an  office  interview. 

Also,  if  these  parties  are  encountered  on  a  social 
footing,  other  introductions  follow  as  a  matter  of 
course,  enlarging  the  promoter's  acquaintance  and 
placing  him  in  a  better  position  for  his  work.  It 
then  becomes  merely  a  matter  of  business  judgment 
and  ability  as  to  when  and  how  the  enterprise  to  be 
financed   is  best   introduced   and  presented. 

A  good  letter  of  introduction  serves  as  a  basis  of 
confidence.  If  the  party  to  whom  the  introduction 
is  addressed  cannot  or  does  not  care  about  taking  up 
the  proposed  enterprise  himself,  he  will  usually  in- 
troduce or  secure  an  introduction  to  some  other  party 
who  may  be  interested,  or  will  suggest  some  plan  or 
way  in  which  the  necessary  finance  may  be  secured. 
The  promoter  is  not  looked  upon  as  a  stranger,  but 
as  a  friend  to  be  helped  as  may  be  possible.  He  has 
a  firm  footing  from  which  to  conduct  his  operations. 
He  is  practically  financing  among  friends. 


CHAPTER  XXXI. 

PRIVATE  PRESENTATION. 
Among  Strangers — (Continued) 


When  the  promoter  endeavoring  to  finance  an  en- 
terprise comes  to  New  York  as  a  stranger  or  with 
perhaps  but  a  few  unimportant  business  connections, 
or  when  he  comes  with  letters  of  introduction  that 
avail  him  nothing,  his  condition  is  a  hard  one.  There 
are  then  several  courses  open  to  him  of  varying  de- 
grees of  difficulty  and  discouragement.  He  may  ad- 
vertise for  capital,  he  may  respond  to  the  advertise- 
ments of  those  who  offer  to  supply  capital,  he  may 
endeavor,  without  the  formality  of  introduction,  to 
reach  the  parties  to  whom  his  enterprise  should  appeal, 
or  he  may  endeavor  to  reach  parties  who  will  take 
up  his  enterprise  and,  acting  as  promoters,  finance 
it  for  him. 

Casual  advertising  is  hardly  worth  the  trying.  An 
extensive  campaign  of  publicity,  involving  large  ex- 
pense and  the  skill  of  experience,  is  necessary  for  suc- 
cessful financing  by  advertising.  For  the  ordinary 
enterprise  such  a  campaign  is  impracticable.  Any 
other  plan  of  advertising  for  capital  will  not  ordinarily 
produce  sufficient  results  to  even  pay  its  first  cost. 
The  writer  must  admit  that  he  has  known  some  few 

341 


342  FINANCING    AN    ENTERPRISE. 

cases  where  very  considerable  amounts  have  been 
raised  by  small  casual  advertisements  of  but  six  or 
eight  lines  inserted  in  the  business  opportunities  col- 
umns of  the  New  York  papers.  As  a  rule,  however, 
such  advertising  is  absolutely  fruitless,  the  success 
mentioned  resulting  from  such  a  combination  of  an 
attractive  enterprise,  accidentally  attractive  advertis- 
ing and  good  luck — the  greatest  of  these  being  good 
luck — that  it  establishes  no  precedent  and  the  whole 
matter  may  be  dismissed  from  consideration. 

It  may  be  noted  in  passing  that  any  such  advertis- 
ing will  usually  bring  in  responses — not  from  parties 
who  have  capital  to  invest,  but  from  parties  who  are 
willing  and  even  anxious  to  try  to  find  capital  for  the 
advertiser.  Frequently  they  will  offer  to  advertise  for 
him,  at  his  cost ;  at  all  times  they  will  have  some 
scheme  to  get  money  from  him.  Time,  trouble  and 
expense  will  be  saved  if  such  parties  are  let  severely 
alone. 

Appeals  to  the  numerous  houses  which  advertise  to 
secure  capital  are,  speaking  generally,  even  more  hope- 
less. There  are  many  of  these  houses,  but  the  usual 
result  of  an  application  to  them  is  the  same.  Their 
first  consideration  of  the  matter  is  almost  invariably 
favorable,  no  matter  what  the  enterprise  may  be,  but 
is  with  equal  invariability  followed  by  a  demand  for 
money.  This  demand  is  made  on  such  pretext  as  will 
meet  the  conditions.  If  the  enterprise  is  not  incor- 
porated, a  fee  and  expense  money  for  its  immediate 
incorporation  will  be  demanded.  If  the  enterprise  is 
already  incorporated,  a  re-incorporation  may  be  an- 
nounced  as    essential,   or   if   these   demands   are   not 


PRIVATE  PRESENTATION.  343 

tenable,  money  will  perhaps  be  required  to  get  out  an 
issue  of  bonds,  or  to  take  out  foreign  patents,  or  to 
arrange  a  guarantee  of  stock  or  bonds,  or  possibly 
to  have  a  prospectus  printed,  or  it  may  be  to  advertise 
stock  for  sale,  or  sometimes — and  possibly  the  most 
honest  demand  of  all — money  will  be  requested  as  a 
retainer. 

It  is  but  rarely  that  anything  follows  the  payment 
of  money  on  any  of  these  pretexts,  unless  perhaps 
the  "house"  undertaking  the  financing  of  the  stran- 
ger's enterprise  can  think  of  some  further  plausible 
scheme  for  the  extraction  of  money.  It  is  a  case 
where  the  stranger  and  his  money  are  parted  with  the 
greatest  possible  expedition,  and  thereafter  the  only 
anxiety  of  the  "financing  house"  is  to  be  safely  parted 
from  the  stranger.  Speaking  generally,  a  stranger 
in  New  York  can  safely  and  profitably  terminate  his 
connection  with  any  promoter  or  promoting  house — 
either  prior  to  or  subsequent  to  the  time  such  connec- 
tion is  formed — just  as  soon  as  any  advance  payment 
of  money  is  demanded,  no  matter  what  the  basis  of 
the  demand.  Theoretically  a  concern  undertaking  the 
promotion  of  an  enterprise  is  entitled  to  a  retaining 
fee  or  payment  for  services  to  be  rendered ;  practi- 
cally, in  New  York  City  at  least,  reputable  houses 
taking  up  enterprises  do  not  demand  anything  of 
the  kind,  and  this  is  so  true  that  a  preliminary  demand 
for  money  is  generally  regarded  as  unmistakably 
classifying  the  concern.  The  whole  subject  will  be 
found  more  fully  treated  in  a  subsequent  chapter 
(Chapter  XXXVIII)  under  the  title  of  "Promoters" 
and  "Financiers." 


344  FINANCING   AN    ENTERPRISE. 

If  the  stranger  undertakes  to  reach  parties  to  whom 
his  enterprise  should  more  especially  appeal,  without 
the  formality  of  an  introduction,  the  outlook  is  not 
of  the  best,  but  is  not  hopeless.  Such  things  have 
been  done  with  much  success  and  will  be  done  again. 

When  this  course  is  attempted  the  first  appeal  may 
be  made  either  by  letter  or  by  a  direct  call.  For  in- 
stance, a  party  with  a  valuable  bed  of  marl  may  wish 
to  bring  it  to  the  attention  of  some  good  cement 
company  or  of  some  individual  interested  in  cement. 
He  can  get  the  addresses  of  the  companies  and  also 
their  list  of  officers  from  the  directories.  Then  he 
may  either  write  to  these  parties  or  may  call  and 
gain  access  to  them  if  he  can.  If  he  decides  to  write, 
his  letter  had  better  be  addressed  in  each  case  to  one 
of  the  company  officials.  A  letter  bearing  merely  the 
company's  address  might  not  get  into  the  right  hands 
and  therefore  fail,  but  any  official  receiving  such  a 
letter  would,  if  the  matter  were  really  of  interest,  see 
that  the  letter  reached  the  proper  person.  In  the  ab- 
sence of  any  information,  one  of  the  higher  officials 
might  be  selected  at  random,  though  an  enquiry  at 
the  company's  office  would  probably  elicit  the  name 
of  the  official  best  addressed.  Then  a  brief,  concise, 
strong  letter  should  be  written,  stating  exactly  what 
the  owner  of  the  marl  bed  has  and  what  he  wants 
to  do  with  it. 

Such  a  letter  should  be  as  short  as  it  can  be  made 
and  still  contain  sufficient  information  to  enable  the 
recipient  to  determine  whether  the  matter  is  really  of 
importance.  A  full  presentation  should  not  be  at- 
tempted.    In  the  case  under  consideration,  the  letter 


PRIVATE  PRESENTATION.  345 

should  give  the  extent  and  depth  of  the  marl  bed, 
the  quality  of  the  material,  if  possible,  and  any  tests 
or  actual  uses  to  which  it  has  already  been  submitted. 
The  general  condition  of  the  bed — by  what  title  it 
is  held,  shipping  facilities,  convenience  of  location, 
etc.,  etc. — together  with  any  peculiar  advantages  it 
possesses  should  also  be  briefly  set  forth.  Finally  it 
should  be  stated  whether  the  bed  is  for  sale  or  lease, 
or  is  to  be  handled  in  some  other  way,  and  some 
general  idea  of  the  terms  should  be  given.  A  sample 
of  the  marl  might  also  be  sent.  If  the  party  really 
has  something  of  value,  a  good  business-like  letter 
of  the  kind  will  usually  elicit  a  response,  and  a  cour- 
teous response,  even  if  it  be  only  to  turn  the  propo- 
sition down. 

If  the  party  addressed  is  interested  by  the  letter, 
he  may  write  for  further  details,  but  will  usually  in- 
vite the  writer  to  call.  Then  the  matter  takes  on  a 
favorable  aspect.  The  party  calling  should  be  pre- 
pared to  identify  himself — best  by  his  letter  of  invi- 
tation— and  should  bring  some  evidence  that  he  is 
a  responsible  party  or  is  really  empowered  to  act  in 
the  matter.  He  should  also  be  ready  to  substantiate 
the  statements  of  his  letter  and  to  furnish  any  other 
pertinent  details  that  may  be  required.  The  whole 
matter  is  then  one  of  a  strong  presentation,  and  is 
likely  to  lead  to  business.  Even  if  it  does  not,  the 
opening  so  created  may  result  in  other  introductions 
or  suggestions  that  will  be  of  advantage. 

If  the  owner  of  an  enterprise  prefers  to  make  a 
personal  visit  to  the  parties  he  wishes  to  interest, 
without  paving  the  way  by  a  preliminary  letter,  he 


346  FINANCING    AN    ENTERPRISE, 

must  equip  himself  with  personal  or  business  cards, 
considerable  assurance  and  a  determination  not  to  be 
discouraged  by  refusals.  In  most  New  York  offices 
he  will  be  given  pause  just  beyond  the  threshold  of 
the  outer  office  by  a  stout  railing,  behind  which  is  an 
office  boy  in  control  of  the  situation.  The  boy  alone 
will  usually  "man"  these  outer  defenses.  The  stran- 
ger's name  will  be  requested  as  also  the  nature  of 
his  business.  He  will  also  be  asked  if  he  has  an  ap- 
pointment, or  is  a  friend  of  the  party  upon  whom 
he  is  calling,  or  be  requested  to  explain  the  basis  upon 
which  the  visit  is  made.  Possibly  the  caller's  card 
will  be  retained,  but  will  not  be  taken  in  at  the  time, 
the  refusal  being  tempered  by  the  terse  explanation 
that  the  parties  called  upon  are  busy.  In  such  case 
the  only  course  is  for  the  visitor  to  withdraw  and 
call  again,  either  at  some  time  suggested  as  likely  or 
convenient  by  the  office  boy,  or  at  such  time  as  he 
may  deem  convenient  for  himself. 

If  the  visitor's  card  is  taken  in,  the  party  called 
upon  may  very  probably  decline  in  toto  to  see  his 
visitor.  If  the  business  is  something  likely  to  appeal 
to  him — as,  for  instance,  the  marl  bed  presented  to 
a  cement  man — he  may  invite  the  stranger  to  call 
again  at  some  indefinite  time  when  he  is  not  busy, 
which  is  a  very  unsatisfactory  arrangement,  or  may 
make  an  appointment,  or  may,  if  not  busy  with  other 
people  at  the  time,  invite  the  caller  right  in  and  dis- 
cuss the  matter  with  him  briefly  then  and  there. 
Usually,  however,  if  he  takes  the  matter  up  at  all 
he  will  make  a  definite  appointment.  If  he  takes  the 
matter  up  at  the  time  it  will  usually  be  a  very  brief 


PRIVATE  PRESENTATION.  347 

discussion,  and  will  be  followed  by  an  appointment 
for  a  more  extended  interview  if  the  matter  seems  to 
justify  further  investigation. 

The  reception  accorded  the  unintroduced  visitor  will 
vary  with  the  custom  of  the  particular  establishment. 
In  some  few  New  York  offices  he  will  find  the  same 
breezy  informality  of  access  that  characterizes  the 
office  life  of  a  western  mining  town,  and  will  be  able 
to  walk  unannounced  and  without  delay  into  the  inner 
office  and  the  presence  of  the  "chief  executive."  In 
others,  and  particularly  when  one  of  the  men  of  great 
and  known  wealth  is  sought,  he  will  find  the  lines 
much  more  closely  drawn.  The  office  boy  will  be 
replaced  by  a  stately  major  domo  who  will  investigate 
the  visitor's  past  history  and  present  business  with 
care  before  moving  in  the  matter  at  all.  If  this  first 
examination  is  successfully  passed,  the  caller  is  re- 
ferred to  a  higher  official  who,  after  due  delay  and 
proper  appointment,  conducts  a  more  searching  ex- 
amination of  the  applicant  and  his  enterprise.  If 
impressed  favorably,  the  applicant  will  be  passed  on 
perhaps  to  the  private  secretary  of  the  man  he  wishes 
to  see,  who  will  again  make  an  investigation  of  the 
presentation  and  the  presenter.  If  this  investigation 
is  again  satisfactory  and  the  private  secretary  deems 
the  matter  too  important  for  him  to  settle  and  one 
that  his  employer  might  be  personally  interested  in, 
the  man  with  the  enterprise  will  at  last  reach  the  inner 
fortress  and  meet  the  magnate,  upon  whom  rests  the 
fate  of  the  presentation.  Usually,  however,  he  will 
be  referred  to  the  head  of  some  department,  or  other 
official  to  whom  the  matter  properly  belongs,  and  will 
never  see  the  head  of  the  office  at  all. 


348  FINANCING   AN    ENTERPRISE. 

It  must  be  borne  in  mind  that  in  any  case  of  this 
kind,  the  unusual  and  informal  method  of  presenting 
the  enterprise  handicaps  it  heavily  at  the  start.  The 
party  called  upon  is  justly  suspicious,  and  if  not  dis- 
posed to  dismiss  the  matter  without  consideration, 
will  look  upon  it  askance.  He  properly  expects  any- 
thing of  the  kind  to  come  through  the  regular 
channels. 

It  is  also  true  that  very  occasionally  the  officials 
of  a  concern  or  institution  will  refuse  peremptorily 
to  receive  a  really  desirable  proposition  in  this  un- 
heralded manner,  for  the  very  simple  but  sufficient 
reason  that  a  direct  presentation  affords  no  oppor- 
tunity for  the  "rake-off"  or  tribute  which  they  are 
accustomed  to  levy  on  all  transactions  of  the  kind. 
Naturally  such  a  reason  for  refusing  a  proposition 
would  not  be  stated  in  words,  but  must  be  read  be- 
tween the  lines. 

In  any  such  case,  if  the  applicant  wishes  to  per- 
severe in  this  direction,  he  must  discover  the  proper 
channel  of  approach.  Perhaps  one  of  the  officials 
will  suggest  a  party  who  might  take  the  matter  up. 
Possibly  the  office  boy  or  some  clerk  or  stenographer 
may  give  a  clue.  In  any  event,  if  the  proper  party  is 
discovered,  he  will  be  quite  willing  to  take  the  enter- 
prise up  and  present  it  to  friends  who  he  thinks  will 
be  interested.  This  party  must,  of  course,  receive  a 
commission  for  his  services.  The  friends  may  be 
interested  when  the  matter  is  presented  to  them  and 
wish  to  present  it  to  other  parties,  and  for  this  pre- 
sentation they  must  also  receive  a  payment  or  com- 
mission.    Sometimes  in  a  case  of  the  kind  the  enter- 


PRIVATE  PRESENTATION.  349 

prise  will  pass  through  half  a  dozen  hands  before 
reaching  its  final  destination,  and  the  accumulated 
commissions  will  be  quite  a  heavy  burden,  though 
dependent  of  course  upon  the  enterprise  being  finally 
financed. 

Under  such  conditions  the  official  who  finally  passes 
upon  the  enterprise  does  not  nominally  receive  any 
profit  from  the  transaction.  As  a  matter  of  fact  he 
receives  his  proportion  of  the  commissions  paid  the 
parties  through  whom  he  is  reached.  In  justice  to 
the  officials  of  New  York  institutions  it  must  be  said 
that  such  conditions,  though  they  will  occasionally  be 
encountered,  are  uncommon. 

It  must  be  remembered  in  any  attempt  at  an  "un- 
introduced"  presentation  that  the  business  men  of 
New  York  have  but  little  time  to  devote  to  irrespon- 
sible strangers,  and  that  the  visitor  is  looked  upon 
as  belonging  to  this  unprivileged  class  until  he  has 
proved  the  contrary.  For  these  reasons  if  he  is  ad- 
mitted he  should  be  prepared  to  make  a  very  incisive, 
clear  statement  as  to  himself  and  his  property.  If 
he  can  once  convince  the  parties  called  upon  that  the 
proposition  is  one  they  should  be  interested  in,  and 
that  he  can  "deliver  the  goods,"  the  visitor  is  likely 
to  be  received  then  and  thereafter  with  all  due  con- 
sideration. The  whole  matter  then  becomes  merely 
one  of  a  good  strong  presentation,  very  concise  and 
pointed  at  first,  to  be  followed  by  such  extended  ex- 
planations and  statements  later  as  the  negotiations 
may  require. 

To  finance  a  good  enterprise  by  the  method  out- 
lined is  difficult,  but  not  at  all  impossible.     Success- 


350  FINANCING   AN    ENTERPRISE. 

ful  men  of  business  are  in  most  cases  successful  be- 
cause they  are  keenly  alive  to  anything  that  may  affect 
their  interests  and,  speaking  generally,  they  are  not 
going  to  turn  down  an  otherwise  attractive  proposi- 
tion because  it  is  presented  informally.  If,  then,  they 
can  once  be  convinced  that  there  are  merits  and  possi- 
bilities for  them  in  any  particular  enterprise,  the  battle 
is  more  than  half  won,  and  the  conditions  are  usually 
as  favorable,  and  sometimes  even  more  so,  than  if 
the  "approach"  had  been  made  in  the  customary 
formal  manner. 

It  is  to  be  noted,  however,  that  an  entrance  of  this 
kind  places  the  parties  on  either  side  in  what  may  be 
termed  a  condition  of  armed  neutrality.  The  business 
man  is  suspicious  of  the  visitor  who  has  dispensed  with 
the  usual  formalities.  He  rather  expects  and  is  on 
the  lookout  for  trickery.  On  the  other  hand,  it  be- 
hooves the  visitor  also  to  be  wary.  He  has  waived 
the  rules  of  the  game,  and  if  the  business  man  sees 
something  attractive,  it  is  quite  possible  that  he  will 
not  respect  the  property  rights  of  his  informal  visitor 
as  far  as  might  be  desirable,  or  as  would  be  the  case 
if  this  latter  were  properly  introduced.  Against  this 
the  visitor  can  only  protect  himself  by  the  exercise  of 
watchfulness,  trading  ability,  and,  if  the  matter  is  to 
be  consummated,  by  the  employment  of  a  good  lawyer. 

In  any  such  presentation  the  fact  must  not  be  lost 
sight  of  that  it  involves  an  intrusion — usually  more 
or  less  unwelcome — upon  the  busy  hours  of  a  busy 
man.  It  is  therefore  the  part  of  wisdom  to  make  the 
first  presentation  as  brief  as  justice  to  the  proposition 
will  permit,  and,  should  the  matter  not  prove  inter- 


PRIVATE   PRESENTATION,  35  J 

esting,  to  retire  at  once  as  soon  as  this  is  definitely 
ascertained.  The  methods  of  a  book  agent  or  hfe 
insurance  sohcitor  cannot  be  followed  too  far  in  the 
presentation  of  an  enterprise. 

If  none  of  these  methods  suggested  for  the  promo- 
tion of  his  enterprise  appeal  to  the  stranger  in  New 
York  City,  there  is  but  one  other  usual  course  open  to 
him.  This  is  to  reach  individuals  or  firms  who  will 
take  up  his  enterprise,  and,  acting  as  his  promoters, 
finance  it  for  him. 

This  is  a  very  different  proposition  from  responding 
to  the  advertisements  of  those  who  professedly  make 
it  their  business  to  finance  enterprises.  The  men  to 
be  reached — that  is,  the  men  who  actually  can  do 
something  for  the  enterprise — do  not  often  pose  as 
promoters,  nor  do  they  advertise.  They  are  not  in 
hiding,  but  neither  are  they  proclaiming  themselves 
on  the  housetops.  They  are  in  businesses  of  their  own, 
and  usually  good  businesses,  and  they  do  not  go  out 
of  their  way  to  secure  enterprises  to  finance.  They 
must  be  looked  for  and  discovered,  and  the  quest  is 
difficult. 

Promoters  of  this  kind  are  not  scarce ;  in  fact, 
there  is  hardly  a  business  man  in  New  York  but  who, 
if  an  enterprise  appeals  to  him  and  is  within  his 
ability,  will  undertake  its  financing.  To  find  the  par- 
ticular man  to  whom  the  enterprise  in  hand  will  ap- 
peal is,  however,  difficult.  Another,  and  almost  as 
great  a  difficulty,  lies  in  the  avoidance  of  the  self- 
alleged  promoters  who  infest  the  financial  district  of 
New  York  and  who,  having  neither  ability,  connec- 
tion nor  standing  to  enable  them  to  finance  an  enter- 


352  FINANCING   AN    ENTERPRISE. 

prise,  are  nevertheless  cheerfully  willing  to  undertake 
to  do  so  on  any  and  all  occasions. 

These  pseudo-promoters  are  numerous.  In  many 
cases  they  are  professionals,  making  their  living  out 
of  the  industry.  In  other  cases  they  are  nominally 
engaged  in  business  for  themselves,  taking  up  pro- 
moting as  a  side  line.  In  still  other  cases  they  are 
merely  "connecting  links" — men  who  do  not  profess 
to  promote  directly,  but  who  know  men  who  can  pro- 
mote. All  of  these  are  usually  men  of  pronounced 
views  as  to  their  own  abilities  as  financiers. 

These  promoters  are  always  on  the  lookout  for 
"deals"  and  when  an  unwary  stranger  comes  their 
way  with  an  enterprise  they  are  very  positive  that  they 
are  the  men  he  is  looking  for,  and  will  with  the  most 
cheerful  optimism  undertake  to  finance  his  enterprise, 
regardless  of  its  condition  or  nature,  on  almost  any 
basis  the  stranger  may  desire.  They  are  very  anxious 
to  undertake  the  work,  rarely  demand  money  in 
advance  because  they  realize  the  hopelessness  of  the 
proceeding,  talk  glibly  and  irresponsibly  of  their  con- 
nections and  past  performances,  are  entirely  confident 
of  their  present  ability,  and  to  the  unacclimated  stran- 
ger with  an  enterprise,  who  is  not  acquainted  with  the 
tribe,  appear  as  the  shadow  of  a  great  rock  in  a  weary 
land.  It  is  but  seldom  that  they  are  of  any  more 
substantial  benefit. 

If  the  unwary  stranger  allows  himself  to  be  en- 
trapped into  an  entangling  contract  with  one  of  these 
promoters,  the  latter  will  usually  make  an  effort  to 
finance  the  enterprise.  He  has  no  conscientious  scru- 
ples against  financing  it  if  he  can.    Usually,  however, 


PRIVATE  PRESENTATION,  353 

he  cannot,  and  the  matter  drags  along  until  the  owner 
of  the  enterprise  becomes  tired  of  the  delay  and  deter- 
mines to  take  his  enterprise  to  other  parties.  Proba- 
bly he  then  finds  that  his  enterprise  has  been  dis- 
credited and  injured  by  the  unfortunate  alliance.  Al- 
most always  he  will  find  himself  tied  up  very  securely 
with  his  "non-promoting"  promoter. 

Either  the  promoter  will  have  provided  for  the 
exclusive  control  of  the  enterprise  for  a  certain  or 
uncertain  length  of  time,  or  he  will  have  a  contract 
for  a  certain  payment  or  perhaps  a  proportion  of  the 
stock  or  other  securities  of  the  enterprise  in  compen- 
sation for  his  efforts  in  the  matter,  or  perhaps  he  has 
both,  and  then  when  the  owner  wishes  to  present  the 
enterprise  elsewhere,  refuses  to  release  his  control  ex- 
cept for  a  substantial  consideration,  or  demands  his 
contract  payment  for  the  efforts  he  has  made  in  the 
matter.  Of  course  the  contract  should  be  worded  on 
the  "no  cure  no  pay"  plan  to  prevent  all  this,  but 
frequently  it  is  not,  and  the  promoter  then  takes  everv 
advantage  of  the  conditions.  It  is  a  fact  that  many 
a  good  enterprise  has  been  seriously  crippled  by  the 
old  man  of  the  sea  attitude  of  its  alleged  promoters. 

This  whole  subject  is  treated  of  in  a  subsequent 
chapter  (Chapter  XXXVIIT),  Init  it  may  be  said  in 
passing  that  parties  placing  enterprises  in  the  hands 
of  others  for  promotion  should  take  every  precaution 
to  guard  against  contracts  for  exclusive  control,  for 
percentages,  commissions,  payments  or  other  claims 
of  any  such  nature  as  will  later  prove  embarrassing 
or  perhaps  absolutely  prevent  them  from  financing 
their  propositions  elsewhere. 


354  FINANCING   AN    ENTERPRISE. 

As  a  rule  reliable  promoters  are  only  to  be  found 
by  indirect  means.  Sometimes,  but  rarely,  they  are 
found  by  advertising.  Such  men  do  not,  as  a  rule, 
read  the  "business  opportunities"  columns  in  which 
such  advertisements  would  usually  appear.  A  good 
card  in  the  financial  columns  of  the  better  papers  of 
New  York  may  sometimes  be  seen  by  them.  Usually, 
however,  they  must  be  found  by  personal  effort.  Per- 
haps a  friend  or  acquaintance  will  direct  the  man  with 
an  enterprise  to  the  party  who  can  promote  it  for 
him,  or  perhaps  the  owner  and  the  promoter  will  be 
brought  together  in  other  business  matters,  or  perhaps 
the  party  with  the  enterprise  will  decide  from  his 
general  knowledge  of  it  and  of  the  situation  who 
ought  to  be  able  to  promote  the  enterprise  and  get 
introductions  to  the  selected  parties. 

These  reliable  promoters  are  not  confined  to  any 
one  class  of  business.  Bankers  occupy  an  enviable 
position  for  financing.  Some  few — as  the  firm  of 
J.  P.  Morgan  &  Co. — make  a  specialty  of  high  class 
promoting.  As  a  rule,  however,  bankers  will  not  ap- 
pear openly  in  ordinary  promotion  work  for  fear  of 
injuring  their  standing  as  safe  and  ultra-conserva- 
tive business  men.  Brokers,  whether  stock,  bond  or 
investment,  also  occupy  an  excellent  position  for  pro- 
moting, and  not  being  troubled  with  the  scruples  that 
keep  bankers  out  of  the  field,  frequently  undertake 
the  financing  of  enterprises.  When  they  do,  they 
usually  make  first-class  promoters. 

Here  the  problem  is  to  find  the  proper  broker. 
There  are  probably  more  than  a  thousand  brokers  in 
New  York  City  alone  engaged  in  dealing  in  securities 


PRIVATE  PRESENTATION.  355 

and  investments  of  one  kind  or  another.  Most  of 
them  are  responsible  and  rehable.  Not  a  few  of  them 
are  much  the  reverse.  They  are  of  all  shades  of  busi- 
ness reputation  and  calling  within  the  limits  of  the 
craft.  Some  of  them  will  "promote"  on  occasion 
and  some  will  not.  To  find,  then,  the  individual  or 
the  concern  to  which  a  particular  enterprise  will  ap- 
peal, if  it  appeals  to  any,  is  frequently  a  matter  of 
great  difficulty. 

If  an  enterprise  is  distinctly  in  the  line  of  one  class 
of  brokers,  that  class  will  naturally  be  appealed  to. 
That  is,  if  a  railroad  is  to  be  financed,  it  would — if 
brokers  are  under  consideration — naturally  be  taken 
to  a  house  dealing  in  railroad  securities,  or  a  mining 
proposition  will  go  to  a  concern  which  makes  a  special- 
ty of  mines  or  mining  stocks,  or  an  industrial  propo- 
sition to  firms  dealing  in  stocks  of  that  nature. 

Doctors  also  on  occasion  make  good  promoters, 
particularly  for  enterprises  that  come  within  their 
province.  Ministers  occasionally  do  surprising  feats 
of  promoting,  but  generally  and  properly  will  have 
nothing  to  do  with  the  work.  The  legal  profession 
provides  a  large  number  of  first-class  promoters.  Law- 
yers are  necessarily  and  intimately  acquainted  with 
the  afifairs  of  their  clients.  They  are  usually  pretty 
good  business  men  themselves.  They  are  always  open 
to  an  opportunity  to  make  money,  and  if  a  good  enter- 
prise comes  their  way  that  appeals  to  them  or  may 
appeal  to  any  of  their  clients,  they  are  not  likely  to 
let  it  pass  by.  In  fact,  at  times  lawyers  are  instructed 
by  their  clients  to  watch  for  suitable  enterprises. 

This  is  particularly  true  in  the  case  of  patent  law- 


356  FINANCING    AN    ENTERPRISE. 

yers,  though  no  member  of  the  guild  would  openly 
admit  the  fact.  More  incipient  enterprises  pass 
through  the  hands  of  patent  attorneys  than  through 
the  hands  of  any  other  class  of  men,  and,  trained  as 
they  are  to  see  the  good  and  bad  points  of  inventions 
and  familiar  with  the  industrial  field,  they  are  in  a 
peculiarly  favorable  position  for  promotion.  Usually 
they  are  on  the  watch-out  for  inventions  which  are 
particularly  desirable.  Even  when  the  patent  attorney 
will  not  act  directly  in  the  matter,  he  will  frequently 
be  able  to  direct  the  owner  of  a  patent  to  the  proper 
sources  to  obtain  the  money  he  needs,  particularly 
if  his  invention  is  a  good  one  appealing  to  special 
industries. 

In  the  field  of  invention  houses  exist  which  make  a 
specialty  of  selling  patents.  The  announcements  of 
these  patent  selling  concerns  appear  in  most  of  the 
publications  relating  to  patents  and  inventions.  Some 
of  these  concerns  are  reliable.  Others  are  very  far 
from  it,  and  difficulty  will  be  found  at  times  in  sepa- 
rating the  wheat  from  the  chafT.  In  dealing  with  them 
the  general  rule  should  be  observed  that  any  request 
for  advance  pavments.  or  indeed  payments  on  any  pre- 
text until  the  patent  is  sold,  is  prima  facie  evidence 
that  the  concern  had  better  be  left  alone.  In  all  cases 
when  a  patent  is  placed  in  the  hands  of  one  of  these 
houses  for  sale,  it  should  be  under  such  a  clean-cut 
contract  as  will  not  tie  the  patent  up  unduly  and  will 
protect  its  owner. 

If  someone  is  discovered  who  is  suitable  and  is 
willing  and  apparently  able  to  undertake  the  financing 
of  an  enterprise — in  other  words,  an  apparently  satis- 


PRIVATE  PRESENTATION.  357 

facto'ry  promoter — the  question  of  a  contract  will 
arise.  It  is  entirely  proper  that  a  contract  should  be 
given.  In  fact,  a  reliable  promoter  would  not  under- 
take the  financing  without,  but  before  such  a  contract 
is  entered  into  the  owner  of  the  enterprise  should 
investigate  very  carefully  and  satisfy  himself  as  to 
the  standing  and  ability  of  his  promoter.  As  a  rule, 
a  man  to  be  successful  in  promotion  must  be  a  man 
of  property,  or  of  good  business  standing  and  repu- 
tation, or  a  man  of  good  connections  with  whom  he 
stands  well.  A  commercial  agency  report  is  the  sim- 
plest way  of  deciding  whether  the  particular  promoter 
possesses  some  or  all  of  these  requisites.  If  the  agency 
report  is  not  available,  or  is  not  conclusive,  enquiry 
must  be  made  among  friends,  or  the  business  con- 
nections of  the  promoter,  or  perhaps  through  the 
banks.  The  matter  is  not  a  difficult  one  if  the  man's 
standing  is  really  good.  If  it  is  not  good,  it  is  some- 
times difficult  to  establish  this  fact  satisfactorily. 

Usually  before  settling  upon  terms,  the  owner  and 
the  promoter  will  discuss  the  whole  matter,  decide 
upon  the  general  line  of  financing — in  which  the  pro- 
moter should  be  able  to  advise  to  much  advantage — 
and  then  come  to  the  compensation  of  the  promoter. 
The  subject  of  terms  between  the  owner  and  the  pro- 
moter is  discussed  in  Chapter  XXXIX,  "Commis- 
sions and  Bonuses,"  and  need  not  be  considered  here. 

It  may  be  stated  generally,  however,  that  the  pro- 
moter expects  and  receives  in  case  of  success,  a  very 
liberal  remuneration.  This  may  be  a  fixed  cash  pay- 
ment, or  a  percentage  of  the  money  secured ;  or  if 
the  subject  matter  be  an  invention,  a  royalty  may  be 


358  FINANCING    AN    ENTERPRISE. 

demanded;  or  if  it  be  a  sale,  a  commission  on  the 
price  will  usually  be  asked.  Or  perhaps  the  inventor 
may  fix  some  flat  price  for  himself  and  allow  the  pro- 
moter to  add  thereto  some  reasonable  or  unreasonable 
amount  as  his  commission,  agreeing  to  protect  the 
promoter  in  the  advanced  price.  This  arrangement 
is  not  uncommon  and  is  discussed  at  some  length  in 
Chapter  XXIII,  "Excessive  Capitalizations." 

Very  commonly  the  promoter's  compensation  will 
be  an  interest  in  the  financed  enterprise — that  is,  either 
he  will  have  an  allotment  out  of  the  stock  or  other 
securities  reserved  for  the  owner,  or  he  will  reserve 
for  himself  a  certain  proportion  of  the  stock  or  secu- 
rities to  be  sold,  or  he  will  merely  undertake  to  put 
a  fixed  sum  of  money  into  the  treasury  of  the  company 
in  consideration  of  a  certain  amount  of  stock  being 
turned  over  to  him.  In  this  latter  case  he  will  save 
for  himself  as  much  of  the  stock  as  he  may  be  able. 

The  contract  with  the  promoter  should  be  clear  on 
all  the  important  points  and  be  formally  drawn.  The 
promoter  will  not  undertake  positively  to  secure  the 
needed  finance.  It  is  obvious  that  he  could  not  do  so 
under  the  conditions  usually  prevailing.  All  he  can 
safely  undertake  is  to  endeavor  to  secure  the  needed 
money,  or  to  interest  suitable  parties.  The  agreement 
with  him  then  should  specify  that  his  payment  is  only 
to  be  earned  and  only  to  become  a  claim  upon  the 
enterprise  in  case  he  is  successful  in  his  attempt.  It 
is  very  important  that  this  should  be  clearly  under- 
stood and  as  clearly  stated  in  the  contract. 

Equally  important,  if  any  exclusive  control  of  the 
enterprise  is  given,  is  a  provision  fixing  some  date  on 


PRIVATE  PRESENTATION.  359 

which  this  control  will  terminate,  unless  the  promoter 
has  financed  the  enterprise  meanwhile  or  has  made 
progress  thereto  satisfactory  to  the  owner.  Then,  at 
the  conclusion  of  that  period,  the  owner  is  free  and 
may  put  the  enterprise  in  the  hands  of  others  if  he 
desires,  the  only  claim  of  the  original  promoter  being 
for  results  actually  secured  in  accordance  with  the 
terms  of  the  contract. 

When  the  owner  of  an  enterprise  has  secured  the 
services  of  a  good  promoter  and  has  entered  into  a 
contract  with  this  latter,  his  own  duties  are  light.  He 
places  the  whole  matter  in  the  promoter's  hands,  giv- 
ing him  all  essential  facts  with  such  material  in  the 
way  of  supporting  documents,  statements,  reports, 
samples,  etc.,  etc.,  as  may  be  necessary  and  he  be  able 
to  secure.  The  promoter  then  practically  does  the  rest. 
He  may  call  on  the  owner  for  demonstration  work 
or  expert  assistance,  if  the  owner  is  qualified,  but  will 
prepare  his  own  prospectus,  arrange  for  the  incorpo- 
ration of  the  enterprise — if  so  agreed — lay  out  his 
own  campaign,  and  carry  it  to  a  probably  successful 
conclusion. 


CHAPTER  XXXII. 

PUBLIC  PRESENTATION. 
By  Circular  Letters. 


The  usual  methods  employed  in  the  public  presen- 
tation of  an  enterprise  involve  too  great  an  expendi- 
ture and  too  elaborate  a  campaign  for  any  ordinary 
financing. 

A  modification  of  these  usual  methods  is,  however, 
sometimes  employed,  which,  not  requiring  such  ex- 
tensive and  costly  exploitation,  can  be  more  generally 
used.  This  is  the  direct  appeal  to  selected  parties  by 
means  of  circular  letters  or  other  printed  matter.  The 
only  necessary  expenditures  are  for  the  preparation 
and  distribution  of  this  printed  matter. 

The  method  of  direct  appeal  partakes  much  of  the 
nature  of  a  private  presentation.  Unless  conducted 
on  a  large  scale,  it  is  far  less  expensive,  is  quieter, 
more  easily  managed  and  perhaps  more  dignified  than 
is  the  usual  public  presentation,  and  has  many  desir- 
able features.  It  is  frequently  adopted,  with  or  with- 
out general  advertising  to  support  it,  in  the  financing 
of  those  sound  and  conservative  enterprises  which 
must  of  necessity  make  a  more  or  less  public  appeal, 
such  as  banks,  surety  and  trust  companies,  building 
associations  and  other  large  and   semi-public  under- 

360 


PUBLIC    PRESENTATION.  361 

takings.  These  lack  the  popular  features  usually 
requisite  for  a  successful  public  presentation,  but  sub- 
stitute for  these  a  safety,  a  solidity  and  a  well-known 
operation  and  management  that  appeals  to  the  con- 
servative investor  far  more  powerfully. 

Circularizing  is  also  at  times,  and  especially  of  late, 
employed  in  financing  the  ordinary  industrial  enter- 
prise. Such  enterprises,  however,  as  a  rule  lack  the 
popular  features  necessary  for  success  in  a  popular 
presentation,  and  have  no  effective  substitute.  They 
must  therefore  usually  depend  upon  private  presen- 
tations for  their  funds,  leaving  the  public  presenta- 
tion, whether  by  circular  letter  or  general  advertising, 
almost  entirely  to  the  speculative  enterprise. 

The  modus  operandi  of  a  presentation  by  circular 
letter  is  simple.  The  letter  is  the  principal  feature  and 
is  prepared  so  as  to  present  the  enterprise  as  strongly 
and  as  attractively  as  possible.  This  letter  will  vary 
in  length  according  to  its  scope — the  shorter  the  better, 
so  long  as  the  proposition  is  properly  covered.  It 
may  or  may  not  be  accompanied  by  a  prospectus. 
If  it  is,  the  letter  may  be  made  very  short.  It  is  in 
fact  sometimes  dropped  entirely,  the  prospectus  being 
used  alone.  The  letter,  however,  gives  a  personal 
element  to  the  presentation  that  is  very  desirable  and 
as  a  rule  it  is  used.  The  advantage  of  employing  both 
letter  and  prospectus  lies  in  the  fact  that  as  the  main 
features  of  the  undertaking  are  presented  in  the  pros- 
pectus, the  letter  may  be  made  much  more  concise 
and  to  the  point  than  would  otherwise  be  the  case. 

This  circular  letter  with  its  accompanying  pros- 
pectus— if  a  prospectus  is  used — is  mailed  or  otherwise 


362  FINANCING   AN    ENTERPRISE. 

delivered  to  such  selected  parties  as  are,  or  should  be, 
or  may  be  interested  in  the  undertaking.  As  a  rule 
when  a  communication  of  this  kind  is  received  it  will 
be  examined  with  some  care,  particularly  if  attractive 
in  matter  and  manner.  It  is  but  rarely  that  a  business 
man  throws  any  communication  into  his  waste  basket 
without  getting  some  idea  of  its  contents,  and  in  al- 
most every  case  no  matter  how  busy  the  recipient  may 
be,  the  letter  will  be  read  in  whole  or  in  part.  It  is 
then  the  function  of  this  letter  to  present  the  important 
features  of  the  enterprise  or  the  proposition  with  such 
strength  and  attractiveness  that  the  interest  of  the 
reader  will  be  aroused — so  much  so  that  either  then 
or  later  he  will  read  the  fuller  presentation  of  the 
prospectus,  or  take  such  further  action  in  the  matter 
as  may  be  desired  by  the  promoters. 

The  circular  letter  is  usually  an  ordinary  fac-simile 
typewritten  letter,  the  name  of  the  party  addressed 
being  inserted  in  a  style  similar  to  that  of  the  body 
of  the  letter,  so  as  to  convey  the  idea  that  the  letter 
is  in  fact  a  personal  and  particular  communication  to 
the  party  addressed.  Such  letters  are  usually  sealed 
and  sent  under  letter  postage  to  carry  out  the  illusion. 
It  is  but  rarely  that  these  letters  deceive,  but  as  they 
cost  but  little  more  than  an  ordinary  printed  letter 
and  undoubtedly  do  have  some  element  of  personal 
appeal,  their  employment  is  justified.  The  use  of  the 
two-cent  stamp  and  the  sealed  envelope  is  usually 
desirable  for  the  same  reason.  Occasionally  when 
exceptionally  good  names  have  been  secured,  actual 
personal  letters — all  of  course  after  the  same  model 
— will  be  written  out  on  the  typewriter  and  be  signed 


PUBLIC    PRESENTATION.  363 

by  the  parties  in  charge  of  the  presentation.  The 
cost  of  these  real  letters  is  not  at  all  excessive  if  pre- 
pared tinder  proper  conditions,  but  they  involve  ad- 
ditional trouble  and  are,  as  a  rule,  used  only  in  special 
cases.  It  is  probable  that  they  could  be  used  more 
freely  to  much  advantage.  The  general  subject  of 
"form"  letters  is  discussed  further  in  Chapter  XXXIV 
of  the  present- volume. 

As  to  the  effectiveness  of  these  fac-simile  letters  as 
compared  with  printed  letters  or  circulars,  we  quote 
from  the  prospectus  of  a  concern  making  a  specialty 
of  furnishing  lists  of  names  for  circularizing:  "The 
question,  'Are  not  just  as  good  results  obtained  by 
mailing  investors  a  printed  circular  as  by  an  imitation 
typewritten  letter?'  is  frequently  asked.  Our  answer, 
backed  by  actual  tests,  is  most  emphatically  no.  Be- 
cause it  is  an  undeniable  fact  that  every  man  and 
woman,  however  high  or  low  may  be  their  station 
in  life,  are  more  susceptible  to  an  appeal  when  made 
to  them  individually  through  personal  letters  than  they 
are  to  one  made  to  the  world  at  large.  Therefore, 
as  the  results  you  will  receive  from  circularizing  will 
largely  depend  upon  the  kind  of  letter  mailed,  it  will 
certainly  pay  you  to  see  that  every  letter  is  as  nearly 
as  possible  an  exact  imitation  of  a  typewritten  letter. 
The  party's  name,  address,  date  and  salutation  must  be 
perfectly  matched  in  at  the  beginning  of  the  letter  so 
that  it  appears  that  the  entire  letter  was  written  on 
the  typewriter." 

The  letter,  as  already  stated,  should,  when  accom- 
panying a  prospectus,  be  brief,  attractive  and  to  the 
point.     It  must  seize  upon  and  hold  the  attention  of 


364  FINANCING    AN    ENTERPRISE. 

the  reader  and  excite  his  interest  to  the  point  of  sub- 
scription if  possible,  but  certainly  to  such  a  pitch  that 
if  the  matter  appeals  to  him  at  all,  he  will  look  into  the 
details  of  the  proposition.  The  letter  will  usually 
contain  a  resume  or  statement  of  the  striking  features 
of  the  particular  enterprise,  or  of  specially  attractive 
features  connected  with  it,  include  perhaps  a  few  per- 
tinent facts  as  to  the  standing  and  ability  of  the  parties 
in  charge,  explain  the  wonderful  liberality  of  the 
proposition  and  give  reasons  why  the  entire  financial 
future  of  the  reader  depends  upon  the  acceptance  of 
this  proposition. 

If  a  prospectus  does  not  accompany  the  letter,  this 
latter  will  of  necessity  be  more  lengthy  and  go  into 
detail  more  fully  than  would  otherwise  be  the  case, 
as  it  must  then  combine  in  itself  both  letter  and  pros- 
pectus and  make  a  brief  but  complete  presentation  of 
the  whole  enterprise. 

The  subject  matter  of  the  prospectus  when  it  is 
used  in  connection  with  the  circular  letter,  will  be 
much  the  same  as  for  any  other  presentation.  It  must, 
however,  be  borne  in  mind  that  no  personal  work  is 
usually  possible  to  reinforce  this  printed  matter,  and 
that  it  alone  is  relied  upon  for  results.  The  printed 
matter  must  then  be  of  a  high  order. 

The  letter,  or  letter  and  prospectus,  or  prospectus, 
is  sent  out  to  such  selected  names  and  in  such  numbers 
as  the  promoter  thinks  desirable.  He  then  awaits 
returns  from  the  seed  he  has  sown.  These  returns 
range  widely  from  nothing  at  all  to  most  gratifying 
amounts,  varying  with  the  skill  with  which  the  printed 
matter  has  been  prepared,  with  the  judgment  shown 


PUBLIC    PRESENTATION.  365 

in  the  selection  of  names  and  with  the  number  of 
letters  sent  out.  Unless  the  names  are  good,  the 
printed  matter  excellent,  the  enterprise  itself  attractive 
and  the  number  of  letters  sufficient,  the  returns  are 
apt  to  be  distressingly  small. 

The  possibilities  of  this  kind  of  work  are  large. 
In  other  words,  there  are  multitudes  of  small  inves- 
tors with  money  for  investment  if  they  can  be  reached. 
The  following  matter  comes  from  the  prospectus  al- 
ready mentioned:  "In  the  State  of  New  York  alone 
the  savings  banks  have  on  deposit  over  one  billion 
dollars.  This  vast  amount  of  money  is  only  earning 
from  three  to  four  per  cent.  Within  a  radius  of 
one  hundred  miles  of  that  city  there  are  thousands  of 
clerks,  mechanics,  and  professional  men  and  women 
earning  large  salaries  and  having  no  business  of  their 
own  in  which  to  invest  their  surplus  funds.  All  these 
must  seek  channels  for  investment.  Every  state  of 
the  Union  is  prosperous.  There  is  plenty  of  practically 
idle  money  waiting  for  all  classes  of  investment." 

The  statements  of  this  quotation  are  in  the  main 
correct.  There  undoubtedly  is  a  very  large  class  of 
people  who  have  money  for  small  investments  and  for 
whom  it  is  almost  impossible  to  find  desirable  invest- 
ments. If  they  can  be  reached  and  reached  properly, 
the  response  will  be  satisfactory. 

By  way  of  direct  application  our  prospectus  adds : 
"You  can  get  a  portion  of  this  money  if  you  go 
after  it  in  the  right  way  and  present  your  proposition 
to  the  right  people.  It  is  said  there  are  about  seven 
millions  of  stockholders  in  mining,  oil  and  the  cheaper 
industrial  companies,  located  throughout  the  eastern 


366  FINANCING    AN    ENTERPRISE. 

States.  Don't  you  think  it  will  be  profitable  for  you 
to  get  your  investments  before  at  least  a  portion  of 
these  investors?  The  quickest  and  most  economical 
way  to  do  it  is  by  circularizing  lists  known  to  be 
composed  of  such  investors." 

The  conservatism  of  the  suggestion  that  only  a 
portion  of  the  seven  million  stockholders  be  circular- 
ized is  to  be  commended.  The  conclusion  as  to 
the  superiority  of  circularizing  "stock  lists"  over  any 
other  method  of  reaching  the  investor  can  hardly  be 
accepted  in  toto.  These  lists  are  used  by  many  differ- 
ent enterprises  seeking  money  and  new  "unworked" 
names,  which  are  highly  desirable  at  times,  are  not 
to  be  secured  in  this  way. 

Comparing  the  advantages  of  circularizing  over  the 
employment  of  brokers,  as  a  means  of  getting  money, 
the  prospectus  already  quoted  says :  "  'From  the  pro- 
ducer to  the  consumer'  is  always  a  drawing  card. 
It  makes  no  difference  what  kind  of  a  proposition  you 
have;  by  securing  lists  composed  of  investors  suitable 
for  it,  you  can  interest  as  much  capital  as  the  so-called 
brokers.  How  many  of  these  so-called  brokers  have 
any  actual  buyers  or  capital  furnishers?  When  you 
pay  them  from  two  hundred  dollars  to  one  thousand 
dollars  as  a  retainer  or  to  show  your  good  faith, 
ostensibly  to  be  expended  for  printing  and  postage 
stamps,  while  in  reality  perhaps  ten  dollars  is  so  spent 
and  the  balance  pocketed  by  the  brokers,  what  recourse 
have  you?  Spend  your  own  money.  Do  your  own 
mailing  and  you  will  see  that  the  stamps  and  literature 
you  pay  for  are  used.  By  using  but  a  small  proportion 
of  the  money  you  would  otherwise  pay  for  a  broker's 


PUBLIC    PRESENTATION.  367 

expenses,  in  preparing  an  attractive  prospectus  and 
mailing  the  same  yourself  to  lists  of  actual  investors, 
which  we  can  supply  you  with,  we  know  you  will  get 
satisfactory  results." 

This  requires  but  little  comment.  Its  general  rea- 
soning and  statements  seem  to  be  entirely  sound.  The 
apparent  rashness  of  the  claim  that  capital  can  be  se- 
cured for  any  kind  of  proposition  by  this  method  is 
saved  in  the  concluding  phrase,  "you  can  interest  as 
much  capital  as  the  so-called  brokers,"  as  these  latter 
are  somewhat  notorious  for  their  failures  in  the  way  of 
securing  capital  for  clients.  The  iniquities  of  the  con- 
cerns advertising  to  secure  capital  for  enterprises  are 
referred  to  at  some  length  in  a  later  chapter  of  the 
present  volume. 

As  to  the  general  advantages  of  circularizing  as  a 
means  of  raising  money,  our  prospectus  says :  "A 
personal  letter,  accompanied  by  the  right  kind  of  liter- 
ature (not  expensive),  will  always  be  opened  and 
read,  and  if  it  is  sent  to  the  proper  party  business  is 
sure  to  result.  Another  and  very  important  reason 
for  adopting  'The  direct  appeal  through  personal  let- 
ter' system  in  preference  to  others  is,  that  in  addition 
to  its  being  so  effective,  it  is  also  the  most  economical 
of  them  all.  By  selecting  the  most  suitable  lists  for 
the  proposition  offered,  there  will  positively  be  no 
waste  in  circularizing,  as  every  name  on  them  is  of  an 
individual  you  want  to  reach.  It  is  an  easy  matter 
to  reach  the  investor  by  mail,  provided  you  start  right, 
and  it  always  pays.  The  necessary  equipment  for 
mail  order  work  is :  (i )  Up-to-date  lists  composed 
of  investors  known  to  be  interested  in  and  who  favor 


368  FINANCING   AN    ENTERPRISE. 

your  particular  class  of  investment.  (2)  The  best 
known  process  of  a  fac-simile  letter  with  the  name 
and  address  perfectly  matched  at  the  top  and  accom- 
panied by  a  well  written  and  attractive  prospectus. 
(3)  About  fifteen  days  after  first  letter,  a  second  and 
then  a  third  follow-up  letter  should  be  mailed  to  those 
not  replying  to  first  communication.  We  know  of 
some  companies  who  go  over  each  list  not  less  than 
six  times,  and  it  pays  every  time.  A  careful  record 
of  those  answering  the  first  communication  should  be 
made  by  checking  their  names  on  the  list.  Many 
brokers  and  companies  have  made  the  mistake  of  cir- 
cularizing the  list  but  once,  and  for  a  lack  of  confidence 
or  for  the  necessary  money  to  buy  stamps  throv;^  it 
aside  and  'knock'  circularizing.  The  best  results  are 
usually  secured  from  the  second  and  third  communi- 
cations." 

The  statements  quoted  are  much  to  the  point,  are 
reasonably  accurate,  and  their  suggestions  are  in  the 
main  good.  It  must,  however,  be  borne  in  mind  that 
the  prospectus  quoted  from  has  for  its  direct  purpose 
the  sale  of  names  to  those  who  wish  to  adopt  the 
method  of  financing  discussed,  and  its  recommenda- 
tions must  therefore  be  received  with  some  reserva- 
tions. Its  optimism  as  to  the  ease  and  certainty  of 
getting  money  by  the  method  suggested  is  also  to  be 
liberally  discounted. 

The  names  employed  for  circularizing  should  be 
selected  with  much  care.  Every  poor  name  represents 
a  distinct  loss  of  money,  time  and  effort.  In  a  very 
small  presentation  the  list  might  merely  include  names 
personally  known  to  the  promoter.     Ordinarily,  how- 


1 


PUBLIC    PRESENTATION.  369 

ever,  circularizing  is  conducted  on  a  much  larger  scale. 
A  very  restricted  presentation  will  send  some  hundreds 
of  circular  letters  and  the  usual  modest  presentation 
of  the  kind  would  send  out  as  many  thousands.  From 
this,  the  number  runs  up  into  the  hundreds  of  thou- 
sands and  even  millions  of  circulars  sent  out  in  financ- 
ing the  larger  undertakings. 

In  any  of  these  cases  lists  of  names  may  be  obtained 
from  various  sources.  The  classified  business  direc- 
tories are  sometimes  used  in  making  up  lists  when 
the  enterprise  appeals  to  a  particular  class,  or  the 
reference  books  of  the  commercial  agencies  when  the 
standing  of  the  parties  is  of  importance.  As  a  rule, 
however,  the  names  for  circularizing  purposes  are 
purchased.  Concerns  exist — such  as  that  originating 
the  quotations  of  the  present  chapter — which  make 
a  specialty  of  selling  classified  lists  of  names.  The 
advertisements  of  these  concerns  may  be  found  in  the 
financial  papers,  and  the  majority  of  their  lists  are 
fairly  reliable.  Another  source  from  which  names  are 
commonly  obtained  is  found  in  the  addressing  agen- 
cies of  the  larger  cities.  These  agencies  make  a  busi- 
ness of  addressing  envelopes,  wrappers,  etc.,  etc.,  and 
almost  invariably  possess  lists  of  names  which  they 
use  themselves  and  which  they  are  always  willing  to 
sell  to  outside  parties.  The  prices  of  these  lists  vary 
greatly  according  to  the  character  of  the  names  and 
the  standing  of  the  concern  which  sells  them.  The 
price  will  ordinarily  range  from  two  to  three  dollars 
a  thousand  upward,  according  to  quantity  and  qualitv. 

Occasionally  excellent  lists  of  names  are  obtainable 
which  have  been  secured   in  the  financing  of  some 


SyO  FINANCING   AN    ENTERPRISE. 

Other  enterprise  by  general  advertising.  The  hsts  of 
stockholders  of  existing  enterprises  of  a  similar  char- 
acter also  afford  exceptionally  good  material  for  this 
kind  of  work.  Some  special  enterprises  appealing  to 
particular  classes,  as  bankers,  lawyers,  doctors,  etc., 
will  find  directories  covering  the  entire  United  States 
already  prepared  for  their  use. 

The  statements  of  the  preceding  quotation  as  to 
follow-up  letters  must  be  received  with  some  caution. 
Actual  experience  in  circular  work  does  not  fully  bear 
out  its  claims.  These  follow-up  letters  are  merely 
letters  sent  out  to  the  parties  to  whom  circular  letters 
have  already  been  sent  but  from  whom  no  response 
has  been  received.  These  later  letters  are  intended 
to  reinforce  the  appeal  of  the  first  and,  if  possible, 
to  bring  the  recipients  into  the  fold.  In  some  cases 
a  cumulative  effect  is  undoubtedly  produced  by  one 
letter  coming  after  another,  but  as  a  rule  the  best  re- 
sults will  be  secured  from  the  first  circularizing.  From 
the  second  lot  a  smaller  percentage  of  responses  will 
be  received ;  from  the  third  mailing  a  still  lower  per- 
centage, and  so  on. 

Here  comes  in  one  great  advantage  of  circularizing 
as  a  means  of  financing.  No  great  risks  need  be  taken 
at  any  time.  The  first  attempts  in  all  directions  may 
be  experimental.  The  first  lot  of  circulars  may  be  few 
in  number — though  they  must  always  be  sufficient  to 
give  a  real  test  of  the  presentation — and  the  parties 
in  charge  will  be  governed  by  the  results.  If  the  re- 
turns are  small  or  inadequate,  either  the  proposition 
is  not  suitable,  the  presentation  is  not  sufficiently  at- 
tractive, or  the  names  are  not  good.     If  suspicion  is 


I 


PUBLIC    PRESENTATION.  37 1 

directed  to  the  presentation,  more  attractive  letters 
may  be  gotten  up  and  mailed  again  either  to  the 
same  list  or  to  new  names.  If  the  lists  of  names 
are  of  doubtful  quality,  new  lists  may  be  tried,  and 
this  experimental  method — this  feeling  of  the  way — 
may  be  continued  with  comparatively  small  expendi- 
ture until  the  success  or  the  failure  of  the  method 
for  that  particular  enterprise  has  been  demonstrated. 

So  also  with  the  follow-up  letters.  These  letters 
may  be  tried  with  a  limited  number  of  the  names 
already  circularized.  If  the  results  are  good,  the  pro- 
cess will  naturally  be  continued.  If  the  results  are 
not  good,  it  may  be  discontinued  without  serious  loss 
having  been  incurred.  The  subject  of  follow-up  letters 
is  more  fully  discussed  in  Chapter  XXXIV,  "News- 
paper and  Magazine  Advertising." 

In  any  experimental  work  of  this  kind  it  should 
be  borne  in  mind  that  the  effort  must  be  on  a  sufficient 
scale  to  really  prove  the  success  or  failure  of  the  plan. 
A  few  circulars  would  be  no  test  of  a  presentation. 
A  few  hundred  might  not  be  a  conclusive  proof,  though 
this  number  should  in  an  ordinary  presentation  bring 
some  result  and  be  sufficient  to  show  whether  the  right 
lines  are  being  followed  and  whether  the  effort  should 
be  extended  along  these  lines.  A  few  thousand  cir- 
culars would,  however,  usually  be  a  more  satisfactory 
test  and  be  necessary  to  really  establish  the  merits  or 
defects  of  any  special  features  of  the  presentation. 

As  to  how  the  prospective  stockholders  should  be 
treated,  the  prospectus  quoted  from  says :  "Let  the 
prospective  investor  have  the  opportunity  of  investing 
in  your  securities  at  'Ground  Floor  Prices.'     Do  not 


372  FINANCING    AN    ENTERPRISE. 

ask  Par  for  the  securities  of  a  corporation  just  begin- 
ning. Start  a  limited  number  of  your  shares  at  a 
fair  price  and  through  circularizing  create  a 
market  for  them.  You  can  then  offer  the  next  allot- 
ment at  an  advanced  price.  If  you  treat  investors 
fair,  assuring  them  of  a  'Square  Deal'  for  their  money, 
they  will  furnish  your  Company  with  all  the  capital 
it  requires.  Stockholders  should  be  considered  and 
treated  as  partners.  They  should  be  furnished  at 
stated  periods  with  detailed  reports  of  the  progress 
being  made  and  the  future  prospects  of  the  Company, 
as  they  like  to  know,  and  are  entitled  to  the  informa- 
tion as  to  what  is  being  done  with  their  money." 

This  statement  is  unduly  optimistic  as  to  the  ease 
with  which  capital  will  be  secured  and  the  simplicity 
of  the  general  proceeding,  but  is  eminently  just  as  to 
the  treatment  to  be  accorded  prospective  investors  and 
stockholders. 

The  classification  of  investors  by  this  prospectus 
is  interesting  and  to  the  point.  They  are  divided  into 
three  classes.  The  first  or  conservative  investor,  the 
man  who  buys  gilt-edged  securities  only,  is  passed 
over  lightly  as  unpromising  material  for  circular  work. 
The  third  class,  composed  of  those  who  dabble  in 
"Wall  Street  securities,"  is  also  dismissed  under  the 
general  characterization  of  gamblers  "wedded  to  the 
Street."  The  second  class,  composed  of  the  great 
army  of  small  investors  is,  with  justice,  more  highly 
considered,  and  is  treated  of  at  some  length  as  follows : 
"Under  "this  class  is  a  vast  army  of  small  investors 
located  all  over  the  country  who  have  a  burning  de- 
sire for  large  profits  and  quick  returns  upon  a  small 


PUBLIC    PRESENTATION.  373 

investment.  'An  income  for  life  on  a  small  invest- 
ment' reads  the  advertisement.  '$1,200  a  year  for 
life,'  or  '$100  invested  five  years  ago  is  now  vv^orth 
$5,000'  reads  another.  These  are  the  kind  of  invest- 
ments they  are  looking  for.  This  class  of  investors 
will  buy  anything  that  is  offered  to  them  if  offered  in 
the  right  way.  What  the  merits  of  your  proposition 
are  amounts  to  little.  It's  what  you  say  about  it  and 
how  you  say  it  that  counts.  While  this  class  of  in- 
vestors must  necessarily  be  classed  as  the  'small  in- 
vestor,' it  is  wrong  to  think  that  their  investments 
are  limited  to  a  ten-dollar  bill.  We  have  found  among 
mining  and  oil  stockholders  lists  the  names  of  many 
men  occupying  prominent  positions  where  their  in- 
vestments ran  into  hundreds  of  dollars.  The  people 
composing  this  class  of  investors  are  usually  found, 
however,  among  clerks,  mechanics,  small  store-keep- 
ers and  professional  men  and  women  having  a  desire 
to  better  their  condition  by  investing  the  few  hundred 
dollars  of  their  surplus  funds  where  it  will  produce 
the  largest  and  quickest  returns.  If  you  had  the  name 
of  every  stockholder  in  every  mining,  oil  or  cheap 
industrial  company  in  this  country,  you  would  find 
ninety  per  cent,  of  them  to  be  investors  of  the  above 
class.     *     *     * 

"This  class  of  investors  are  by  far  the  easiest  to 
interest  through  the  mails.  They  are  the  most  sus- 
ceptible to  the  'Direct  Appeal,'  through  well  written 
'Personal  Letters.'  It  is  this  army  of  small  investors 
who  are  easily  interested  and  will  invest  in  the  stock 
of  mining,  oil  and  the  cheaper  industrial  enterprises 
because  they  offer  the  largest  and  quickest  profits." 


374  FINANCING    AN    ENTERPRISE. 

This  is  a  very  bald  statement  of  the  conditions,  but 
in  the  main  is  undoubtedly  correct.  The  ethics  of  its 
suggestions  need  no  discussion  here.  As  to  lists  of 
names  it  must  be  borne  in  mind  that  those  usually  fur- 
nished by  the  addressing  agencies  and  other  similar 
concerns  as  well  as  those  taken  from  the  reference 
books  of  the  commercial  agencies  are  what  might  be 
termed  "stock  names" ;  that  is,  names  which  are 
furnished,  or  are  accessible  to  all  who  desire  them. 
Probably  all  of  them  have  been  recipients  of  circular 
letters  or  prospectuses  from  numbers  of  the  enterprises 
then  on  the  market.  This  being  true,  substantial  re- 
sults will  require  a  presentation  at  least  as  attractive 
in  some  way,  either  as  to  the  enterprise,  as  to  the 
printed  matter  or  as  to  the  proposition,  as  those  which 
have  gone  before,  or  perhaps  the  presentation  may 
succeed  without  equal  or  superior  attractiveness  mere- 
ly because  it  is  timely. 

In  conclusion  it  may  be  said  that  while  there  are 
undoubtedly  merits  in  circularizing  as  a  method  of 
financing  enterprises,  its  expenses  are  not  inconsider- 
able and  some  business  skill  and  ability  are  usually 
requisite  to  success.  Literature — and  literature  of 
good  quality — must  be  provided,  good  names  must  be 
secured,  the  printed  material  must  be  properly  pre- 
pared for  mailing,  and  postage  must  be  paid.  Further, 
much  correspondence  is  usually  involved  and  the  in- 
cidental expenses  are  apt  to  mount  up  rapidly  unless 
carefully  watched. 

Also,  should  the  presentation  be  poor,  failure  is 
inevitable.  Or  should  the  list  of  names  secured  be 
unsuitable,  or  "worn  out"  before  it  comes  into  the 


PUBLIC    PRESENTATION.  375 

hands  of  the  party  circularizing,  the  results  will  be 
meagre  even  if  the  enterprise  and  printed  matter  are 
of  the  best.  Sometimes,  also,  when  every  condition 
seems  favorable,  an  effort  will  fail  in  a  way  that  can- 
not be  explained. 

Before  the  method  is  adopted  in  any  case  it  would 
be  prudent  for  the  interested  parties  to  investigate 
with  some  fullness  just  what  is  being  done  in  this 
line  by  others.  As  the  circularizing  method  is  of 
the  "still  hunt"  variety,  it  may  be  difficult  to  secure 
matter  sent  out  under  this  plan.  The  printed  matter 
sent  out  in  the  usual  public  presentation  is,  however, 
as  a  rule,  equally  suitable  for  circular  work,  and  as 
such  printed  matter  is  largely  advertised  in  any  finan- 
cial or  investment  paper,  samples — and  very  excellent 
samples — are  not  difficult  to  secure.  A  careful  study 
of  these  specimens  will  give  a  clearer  knowledge  of 
what  is  to  be  done  and  the  best  way  of  doing  it,  than 
anything  else  short  of  actual  experience. 


CHAPTER  XXXIII. 

PUBLIC  PRESENTATION. 
Newspaper  and  Magazine  Advertising. 


The  financing  of  an  enterprise  by  means  of  a  gene- 
ral advertising  campaign  involves  magazine  and  news- 
paper advertising,  followed  up  by  means  of  pros- 
pectuses, letters  and  other  printed  matter,  may  also 
include  circularizing,  and  is  sometimes  reinforced  by 
the  personal  work  of  agents.  The  method  is  always 
an  expensive  one  and  the  enterprise  must  usually  be 
of  a  speculative  nature  in  order  to  afford  sufficient 
margin  for  expenses  and  at  the  same  time  allow 
for  offerings  sufficiently  attractive  to  interest  the  in- 
vesting public.  The  capitalization  of  such  an  enter- 
prise is  naturally  high,  as  a  rule  running  from  $500,- 
000  upwards,  and  the  par  value  of  shares  is  as 
naturally  low,  ranging  from  $1  to  $10.  It  is  obvious 
the  stock  issued  on  such  a  basis — the  initial  value  of 
the  enterprise  usually  being  small — can  be  sold  at 
the  customary  first  price  of  a  few  cents  per  share 
without  any  serious  sacrifice  of  values. 

The  cost  of  raising  money  by  a  general  advertising 
campaign  is  excessive — running  according  to  the  esti- 
mates of  those  in  a  position  to  judge  from  twenty 
to  fifty  per  cent,  of  tlie  total  amount  secured.     In  other 

37(^ 


PUBLIC    PRESENTATION.  377 

words,  from  twenty  to  fifty  cents  must  be  expended 
to  sell  a  dollar's  worth  of  stock,  and  if  $40,000  is 
raised  by  means  of  advertising,  from  $8,000  to 
$20,000  of  this  total  amount  is  consumed  in  the  ex- 
penses of  the  operation,  leaving  a  net  amount  of  from 
$20,000  to  $32,000  for  the  development  or  other 
purposes  of  the  enterprise. 

When  the  higher  costs  are  incurred  the  method  is 
barred,  save  for  speculative  enterprises.  If  the  cost  is 
fifty  per  cent.,  as  is  often  the  case,  one  dollar  must 
be  paid  for  every  dollar  secured  for  the  use  of  the 
enterprise,  and  if  $20,000  is  required  for  the  develop- 
ment of  the  enterprise,  $20,000  must  be  expended  in 
securing  that  amount.  At  first  sight,  then,  it  would 
seem  to  be  very  much  better  business  to  merely  invest 
the  initial  $20,000  directly  in  the  enterprise  without 
the  circuitous  and  troublesome  method  of  spending  it 
to  get  the  same  amount  back  again,  especially  as  in 
the  process  the  enterprise  parts  with  stock  to  the  cash 
value  of  $40,000. 

The  explanation  of  the  promoter's  preference  for 
the  "longer  way  round"  is  not,  however,  hard  to  find. 
The  enterprise  does  not  usually  possess  this  $20,000 
— or  whatever  the  amount  needed — and  neither  do 
its  promoters — or  if  these  latter  have  the  amount, 
they  are  not  willing  to  risk  it  in  the  enterprise.  In- 
stead, they  put  up  a  few  thousand  dollars  to  start 
the  campaign,  use  the  returns  as  they  come  in  for  its 
continuance  and  reimburse  themselves  meanwhile  from 
the  first  returns  available  for  the  purpose.  In  this 
way  the  promoter  avoids  any  excessive  risk  and  any 
personal  expenditures  beyond  the  first  advance,  which 


378  FINANCING   AN    ENTERPRISE. 

is  only  sufficient  to  carry  the  movement  to  the  point 
of  self-support.  When  the  campaign  is  well  under 
way  it  is  carried  on  until  the  total  net  receipts — 
that  is,  the  amounts  received  in  excess  of  the  cost 
of  advertising,  general  expenses,  payments  to  the  pro- 
moters, etc. — aggregate  the  $20,000,  or  whatever  other 
amount  may  be  required. 

It  is  obvious  that  in  the  end  the  investor  puts  up  all 
the  money.  He  pays  for  the  cost  of  his  own  dis- 
covery, i.  e.,  for  the  expenses  of  the  campaign,  pro- 
vides also  the  money  for  the  promoter's  first  profits 
and  then  supplies  funds  for  the  development  of  the 
enterprise.  As  to  the  general  results,  fifty  cents  of 
every  dollar  the  investor  puts  in  is  used  up  in  the 
expenses  of  the  advertising  campaign  and  fifty  cents 
is  devoted  to  the  more  direct  purposes  of  the  enter- 
prise. 

Meanwhile  the  enterprise  must  assume  the  entire 
burden.  The  money  raised  is  of  course  obtained  by 
the  sale  of  its  stock.  As  only  half  the  total  amount 
received  goes  to  the  proper  use  of  the  enterprise — 
the  balance  being  consumed  in  the  expenses  of  the 
campaign — twice  as  much  stock  must  be  sold  as  would 
otherwise  be  necessary.  That  is,  if  $20,000  is  required 
for  the  enterprise,  stock  to  the  cash  value  of  $40,000 
must  be  sold  to  secure  it.  If  sold  at  the  average  price 
of  two  cents  for  shares  of  the  par  value  of  $1,  as  is 
not  uncommon,  2,000,000  shares  must  be  sold  to 
secure  the  desired  amount,  or  capital  stock  of  the  par 
value  of  $2,000,000  is  sold  to  secure  a  net  cash  amount 
of  $20,000.  The  enterprise  must  then,  to  be  success- 
ful, pay  dividends  on  his  excessive  stock  issue.     It  is 


PUBLIC    PRESENTATION.  379 

obvious  that  any  enterprise  that  can  stand  such  a 
strain  successfully  must  indeed  be  one  of  golden  possi- 
bilities. 

As  a  matter  of  fact  the  majority  of  speculative 
enterprises  financed  or  attempted  to  be  financed  by 
this  method  are  failures.  Those  that  do  succeed  are 
mainly  mines  in  which  the  speculative  possibilities 
are  larger  than  in  any  other  class  of  enterprise. 

The  cost  of  raising  money  by  this  method,  as  well 
as  several  other  features  of  interest,  are  brought  out 
with  unusual  clearness  in  the  interesting  report  which 
follows.  This  was  sent  to  stockholders  by  the  fiscal 
agents  of  a  company  that  was  being  financed  by  means 
of  an  advertising  campaign.  The  company  was  form- 
ed for  the  purpose  of  dealing  in  securities — principally 
stocks  and  bonds  of  mining  companies.  The  state- 
ment shows  the  receipts  and  expenditures  from  the 
time  of  its  incorporation  until  the  date  of  the  report 
— a  period  of  over  a  year.  The  report  bears  internal 
evidence  of  good  faith  and  is  probably  a  correct  state- 
ment of  the  transactions  covered.  Names  are  changed 
for  obvious  reasons,  but  with  this  exception  the  report 
is  presented  exactly  as  sent  out  by  the  fiscal  agents 
of  the  company. 

The  period  covered  by  the  report  comprises  the  first 
sixteen  months  from  the  date  of  incorporation  of  the 
company. 

This  report  is  somewhat  complicated  by  the  fact 
that  the  company  was  itself  meanwhile  acting  as  fiscal 
agent  for  the  sale  of  stock  in  two  other  corporations. 
The  transactions  for  these  other  companies  are,  how- 
ever, small  and  for  the  purposes  of  the  present  dis- 


380  FINANCING   AN    ENTERPRISE. 

cussion  may  be  disregarded,  the  items  relating  directly 
to  these  other  companies  being  omitted  in  the  consider- 
ation which  follows. 

Financial  report  of 

THE  GOLD  MOUNTAIN  SYNDICATE. 

by 

WiLKiNS  &  Freeman,  Fiscal  Agents. 

Receipts. 

Sales  of  Treasury  Stock: 

576,870  shares  at  i  cent    $  5,768.70 

484,550  shares  at  2  cents 9,691.00 

88,000  shares  at  3  cents 2,640.00 

23,280  shares  at  5  cents 1,164.00 

21,050  shares  at  6  cents 1,263.00 

27,095  shares  at  10  cents 2,709.50 

3  shares  sold  to  the  directors  at  par.  3.00 

Total,  1,220,848  shares $23,239.20 

From  Other  Sources: 

Received  on  installments  for  which  no  stock 

is  issued  yet $   1,826.05 

Moneys  received  from  sale  of  stock  in  The 
Mountain  Milling  Co.  (balance  due  the 
Treasury  of  that  Company) 1,924.20 

Moneys  received  due  to  Treasury  of  The 

Consolidated  Lead  Co 578.62 


PUBLIC    PRESENTATION.  381 

(The  Gold  Mountain  Syndicate  being  Fis- 
cal Agent  for  these  companies  under 
the  management  of  their  Fiscal  Agents, 
Wilkins  &  Freeman.) 

Accounts  payable  (moneys  advanced)   ....        478.22 


Total    Receipts    $28,055.29 


Unissued    shares    in    Treasury,    1,779,152 
shares. 

Expenditures. 

Expenses  general  (current  expenses) $   1,085.56 

Clerk  hire  and  office  help 1,716.40 

Accounting  to  date  on  account 150.00 

Postage   1,398.60 

Printing 1,252.68 

Advertising   3.043-34 

Commissions  on  sale  of  stocks  (to  agents)  .  2,270.92 

Brokerage  (15  per  cent,  to  Fiscal  Agents)  .  3,629.19 

Furniture  and  fixtures 103.00 

Stocks  and  bonds  (purchased  as  per  list)  .  ,    12,201.75 

Accounts  receivable 1,203.85 


E.  &  O.  E.  $28,055.29 


First  looking  at  the  sales  of  stock,  we  see  that  the 
total  receipts  are  as  follows : 

Proceeds  from  stock  issued $23,239.20 

Receipts  from  stock  sold  but  not  yet  issued.      1,826.05 


Total    $25,065.25 


382  FINANCING    AN    ENTERPRISE. 

Now  looking  at  the  expenditures  we  find  the  follow- 
ing, which  may,  it  is  a  fair  presumption,  be  charged 
in  full  to  the  cost  of  the  campaign  for  money : 

Postage   $  1,398.60 

Printing 1,252.68 

Advertising  3.043-34 

Commissions  on  sales  of  stock  (to  agents)  .      2,270.92 
Brokerage  (15  per  cent,  to  Fiscal  Agents) .      3,629.19 

Total   $11,594.73 

Out  of  the  general  expense  for  clerk  hire  and  office 
help,  it  would  not  be  unreasonable  to  assume  that 
at  least  half  can  be  charged  to  the  expense  of  selling 
stock.  This  gives  us  $1,400.98  to  be  added  to  the 
total  of  expenditures  for  sale  of  stock,  and  our  con- 
densed statement  then  stands  as  follows : 

Total  receipts  from  stock  sales $25,065.25 

Total  expenditures  to  sell  this  stock 12,995.71 

Net  proceeds  for  company  purposes.  .  .  .$12,069.54 

This  very  rough  approximation  shows  that  in  order 
to  secure  $12,069.54  for  the  operations  of  the  com- 
pany not  less  than  $12,995.71  was  spent.  In  other 
words,  over  one-half  of  the  total  amount  raised  was 
expended  in  the  campaign  that  raised  this  amount, 
and  every  dollar  secured  by  the  company  for  its  own 
proper  purposes  cost  the  company  an  equal  amount. 

It  is  to  be  noted  that  the  largest  single  item  of  ex- 
penditure is  the  amount  paid  the  company's  fiscal 
agents — $3,629.19.  Commissions  to  other  agents  foot 
up  to  $2,270.92,  making  a  total  of  $5,900.11  paid  out 


PUBLIC    PRESENTATION.  383 

in  commissions  and  brokerage.  If  the  officers  of  the 
company  had  themselves  conducted  the  campaign,  the 
brokers  and  agents  being  ehniinated,  this  amount 
would  have  been  saved,  provided  the  campaign  were 
conducted  with  equal  ability.  An  additional  expendi- 
ture for  officers'  salaries  would  have  been  incurred, 
however,  and  it  is  doubtful  whether  the  general  result 
would  have  been  materially  changed.  Unless  the  offi- 
cials were  skilled  in  the  work,  the  results  might  not 
have  been  as  good.  If  they  were  skilled  it  is  probable 
that  they  would  have  demanded  and  received  salaries 
which  would  have  practically  equalled  the  commis- 
sions actually  paid. 

As  to  the  amount  of  money  necessary  to  begin  a 
campaign  of  the  kind,  the  following  extract  from  a 
recent  prospectus — quoted  freely  in  a  preceding  chap- 
ter— is  in  point :  "Unless  you  have  at  the  start  not 
less  than  ten  to  twenty  thousand  dollars  to  spend  in 
broadcast  newspaper  and  magazine  advertising  and 
are  prepared  to  keep  the  advertisements  constantly 
before  the  public,  you  had  just  as  well  sink  what 
money  you  do  spend  to  the  bottom  of  the  ocean  as 
expect  to  get  it  back  in  stock  sales.  This  fact  has  been 
verified  over  and  over  again." 

The  emphasis  of  this  statement  is  perhaps  accounted 
for  by  the  fact  that  the  company  issuing  it  is  advo- 
cating circularizing  as  the  one  and  only  means  of 
raising  money.  The  minimum  amount  mentioned  is 
higher  than  is  usually  deemed  necessary.  If  an  ex- 
tended campaign  were  undertaken,  $20,000  might  be 
necessary  for  its  inauguration.  Usually,  however, 
half  or  even  one-fourth  of  this  is  deemed  sufficient  to 


384  FINANCING   AN    ENTERPRISE. 

begin  operations  and  to  continue  them  until  the  move- 
ment is  self-supporting — that  is,  to  carry  them  to  the 
point  where  receipts  from  stock  sales  are  sufficient  to 
pay  the  expenses  of  the  further  advertising  and  gene- 
ral work  of  conducting  the  campaign. 

A  local  campaign  confined  to  some  one  district  or 
to  special  publications  might  be  successfully  inaugu- 
rated with  even  less  than  the  prescribed  $5,000.  As 
a  rule,  however,  a  very  liberal  margin  should  be  al- 
lowed when  an  effort  of  the  kind  is  under  consider- 
ation, particularly  if  the  parties  in  charge  are  inex- 
perienced, as  the  expenditures  are  then  almost  certain 
to  be  materially  increased.  Under  any  circumstances 
such  a  campaign  should  be  begun  only  after  a  careful 
preliminary  counting  of  the  cost.  A  well  conducted 
funeral  is  a  cheerful  proceeding  compared  with  an 
advertising  campaign  begun  with  insufficient  funds. 

The  requirements  for  the  underlying  enterprise  to 
be  financed  by  this  method  have  already  been  indicated. 
It  must  permit  of  large  inducements  to  investors — 
in  appearance  at  least — and  attractive  possibilities  of 
profit.  It  should  also  be  of  such  a  nature  as  to  stand 
the  strain  of  the  rather  expensive  proceedings  involved. 

The  advertising  matter  of  a  public  presentation 
must,  as  a  rule,  be  exceptionally  artistic  and  "purchase- 
compelling."  The  conservative  institutions  and  the 
great  industrial  propositions  which  are  sometimes 
financed  by  advertising  methods  do  not  depend  upon 
working  up  the  enthusiasm  of  investors  to  the  point 
of  subscription.  They  merely  make  plain,  cold  state- 
ments of  the  facts — or  of  such  facts  as  they  choose 
the  public  to  know.     The  public  then  invests  on  the 


PUBLIC    PRESENTATION.  385 

strength  of  these  statements  and  on  the  reputation 
and  standing  of  the  parties  who  make  them — not  infre- 
quently, as  in  the  first  financing  of  United  States 
Steel  and  Amalgamated  Copper,  to  their  sorrow. 

The  usual,  enterprise  presented  by  advertising  can- 
not, however,  adopt  this  plan.  The  names  of  its 
promoters  are  not  often  well  enough  known  to  be  an 
element  of  much  strength.  Nor  is  the  past  history  of 
the  enterprise  or  its  present  condition  usually  of  such 
a  nature  as  to  be  in  itself  an  inducement.  What 
does  attract  the  small  investor  is  the  low  price  at  which 
stock  is  offered — one  or  two  cents  perhaps  purchasing 
a  dollar  share — and  the  very  great  possibilities  of 
future  profit. 

In  presenting  an  enterprise  by  this  method,  the 
safety  of  the  enterprise  and  the  honesty  and  ability 
of  its  management  should,  of  course,  be  emphasized 
to  the  utmost  degree  that  the  facts  will  warrant,  but 
the  small  investor's  great  desideratum  is  large  profits, 
and  almost  everything  else  is  subservient  to  this  one 
end.  So  marked  is  this  tendency  that  not  only  are 
funds  secured  by  Franklin  Syndicate  offers  of  impos- 
sible profits  (ten  per  cent,  a  week)  without  any  respon- 
sible backing,  but  the  even  more  barefaced  and  ethe- 
rial  "Do  You  Dare"  ads.  which  neither  professed  hon- 
esty nor  promised  profits,  found  material  support  a 
few  years  since  on  the  mere  intimation  that  from  some 
unknown  source  and  in  some  mysterious  way  aston- 
ishingly large  profits  might  be  forthcoming. 

For  the  ordinary  honest  enterprise,  however,  due 
regard  must  be  paid  to  the  decencies  of  financing. 
The  facts  as  to  the  present  condition  of  the  property 


386  FINANCING    AN    ENTERPRISE. 

and  the  standing  and  ability  of  the  management  must 
— if  stated  at  all — be  stated  exactly  as  they  are.  Also 
any  facts  as  to  profits,  if  stated,  must  be  facts.  Usu- 
ally, however,  when  we  come  to  profits,  facts  are 
unattainable  and  the  promoter  has  free  sway  to  make 
the  best  use  of  the  materials  he  can.  Nothing  short 
of  development  can  determine  what  these  profits  will 
really  be  and  the  promoter  is  therefore  entitled  to  state 
his  beliefs  and  expectations  as  strongly  as  he  sees  fit. 

It  is  not  infrequent  to  hear  the  profit  claims  of  such 
prospectuses  denounced  as  false  and  misleading.  Some 
of  them  unquestionably  do  go  too  far,  announcing  the 
beliefs  and  expectations  of  the  promoters  as  facts. 
This  is,  of  course,  entirely  unjustifiable  and  is  liable 
to  bring  the  promoter  within  the  grasp  of  the  law. 
He  may,  however,  express  his  own  convictions  and 
beliefs,  stated  as  such,  as  freely  as  he  pleases,  and  the 
promoter  whose  inner  convictions  will  not  stand  the 
strain  of  the  most  glowing  presentation  the  occasion 
can  possibly  demand,  has  either  mistaken  his  calling 
or  has  stumbled  on  an  extraordinarily  poor  property. 

In  this  connection  an  extract  may  be  allowed  from 
Mr.  Rowell's  very  interesting  work,  "Forty  Years  an 
Advertising  Agent."  This  describes  the  difficulty  in 
securing  suitable  advertising  matter  for  a  patent  medi- 
cine which  he  was  then  about  to  exploit.  The  princi- 
ples involved  are  much  the  same  as  those  with  which 
the  promoter  must  struggle  when  an  enterprise  is  to 
be  financed  by  public  presentation.  Mr.  Rowell  says : 
"There  is  an  unsuspected  difficulty,  too,  in  preparing 
advertising  matter  that  will  not  seem  tame  and  value- 
less  beside    the    more   glowing   announcements   that 


PUBLIC    PRESENTATION.  387 

appear  daily  in  the  public  prints.  *  *  *  j^-  seems 
to  be  universally  admitted  among  those  who  have 
had  most  experience,  that  in  the  announcements  that 
are  issued  the  advertiser  must  put  it  strong.  'You  are 
starting  out  on  a  long  up-hill  journey,'  said  a  man 
to  me  whose  life  had  been  spent  in  kindred  lines,  'and 
you  must  write  your  advertisements  to  catch  damned 
fools — not  college  professors;'  then,  after  a  moment, 
he  added,  'and  you'll  catch  just  as  many  college  pro- 
fessors as  you  will  of  any  other  sort.'  " 

The  somewhat  roughly  expressed  ideas  of  Mr. 
Rowell's  adviser  must  not  be  taken  too  literally,  but 
their  underlying  truth  will  be  recognized  by  any  pro- 
moter experienced  in  public  presentations.  A  calm, 
direct  and  accurate  statement  of  facts  would  not  at- 
tract. A  more  alluring  presentation  is  absolutely 
essential.  Usually  this  requires  advertisements  and 
printed  matter  of  a  high  degree  of  excellence — not 
always  as  literature  perhaps,  but  certainly  as  to  at- 
tractiveness and  general  effectiveness.  Very  occasion- 
ally this  seems  to  be  attained  by  the  rule  of  contraries 
when  a  poorly  worded,  badly  printed  and  generally 
defective  prospectus  succeeds  from  the  mere  fact  of 
its  crudity.  Seemingly  the  roughness  of  the  prospectus 
is  taken  as  an  evidence  of  the  simple  honesty  and  sin- 
ceritv  of  the  people  behind  the  enterprise.  This  frame 
of  public  mind  cannot,  however,  be  relied  upon  and  the 
prospectus  and  other  printed  matter  must  usually  be 
the  most  attractive  and  persuasive  that  can  be  devised. 

The  great  defect  in  most  prospectuses  used  in  public 
presentations  is,  from  the  standpoint  of  the  more  in- 
telligent  investors,    an   evasion   or   avoidance   of   the 


388  FINANCING    AN    ENTERPRISE. 

facts  which  must  be  known  before  the  safety  of  the 
enterprise,  and,  dependent  thereon,  the  safety  of  in- 
vestment can  be  judged.  In  the  better  class  of  pubHc 
presentations  these  facts  are  gone  into  with  commend- 
able detail,  but  in  the  reckless  financing  so  frequently 
attempted  by  this  method  they  are  usually  evaded 
or  omitted.  When  absolutely  fraudulent  enterprises 
are  presented  by  advertising  methods,  these  features 
are  sometimes  presented  in  full  detail,  and,  notwith- 
standing the  falsity  of  the  alleged  facts,  with  such 
cleverness  and  verisimilitude  of  truth  as  to  deceive 
the  very  elect. 

In  the  prospectus  of  any  legitimate  presentation  the 
capitalization  and  its  connected  details  should  be  given ; 
any  property  owned  by  the  company  be  described; 
the  way  in  which  it  was  acquired  be  stated,  and  the 
manner  in  which  it  is  held  and  the  consideration  for 
its  transfer  to  the  company  be  clearly  set  forth.  The 
name  and  personal  standing  of  each  member  of  the 
management  should  also  be  given,  or  at  least  of  those 
actually  in  charge;  the  financial  condition  and  needs 
of  the  enterprise  should  be  explained,  and  in  short  all 
the  facts  that  a  good  business  man  would  wish  to 
know  before  investing  should  be  set  out  clearly  and 
without  evasion.  Where  this  can  be  done  the  pre- 
sentation is,  if  the  facts  are  favorable,  the  profit  possi- 
bilities good  and  the  offer  liberal,  a  very  strong  one 
and  should  carry.  If  the  conditions  will  not  permit 
of  such  a  statement,  the  unfavorable  facts  should  of 
course  be  presented  in  the  best  light  possible  or  else 
be  avoided  entirely,  so  far  as  it  can  be  done  without 
material  concealment. 


CHAPTER  XXXIV. 

PUBLIC  PRESENTATION. 

Newspaper  and  Magazine  Advertising. 

(Continued) 


In  a  public  presentation  by  newspaper  and  magazine 
advertising  the  selection  of  the  advertising  mediums 
— that  is,  the  pubHcations  to  advertise  in — is  a  matter 
of  paramount  importance.  Their  selection  will  be 
governed  by  the  kind  of  enterprise  that  is  presented, 
the  funds  at  command  and  the  offer  that  is  to  be 
made.  The  larger,  bolder  and  strongly  backed  enter- 
prises will  select  the  daily  papers  of  the  larger  cities, 
preferably  the  Sunday  editions,  taking  on  occasion 
whole  pages.  A  thousand  dollars  a  page  is,  however, 
rather  heroic  treatment  even  for  a  robust  advertising 
appropriation,  and  most  enterprises  seeking  publicity 
will  avoid  these  papers  or  take  small  space.  The 
financial,  investment  and  mining  papers  are  favorite 
mediums.  The  technical  publications  are  sometimes 
good,  and  special  enterprises  will  frequently  indicate 
by  their  character  the  mediums  in  which  their  adver- 
tisements should  appear. 

For  the  inexperienced  promoter  this  whole  matter 
of  advertising  and  selecting  a  medium  is  one  of  much 
difficulty.     Usually  he  does  not  know  to  just  what 

389 


390  FINANCING   AN    ENTERPRISE. 

classes  his  enterprise  will  appeal,  or  in  what  part  of 
the  country  they  are  to  be  found,  or  what  publications 
will  reach  them.  He  may,  of  course,  determine  the 
matter  by  actual  experiment,  but  this  is  a  procedure 
involving  time,  trouble  and  much  expense.  Probably 
in  any  case  of  the  kind  the  employment  of  an  adver- 
tising agency  will  be  advisable.  There  are  unsus- 
pected possibihties  of  assistance  in  these  agencies  and 
they  can  frequently  be  employed  to  great  advantage. 

In  some  cases  it  will  be  found  advisable  to  put  the 
whole  matter  in  the  hands  of  a  financial  agent.  In 
such  case  the  financial  agent  will  undertake  the  whole 
campaign  for  a  percentage  of  the  proceedings,  or  per- 
haps a  certain  amount  for  each  share  of  stock  sold. 
The  scope  of  the  financial  agent's  work  and  his  com- 
pensation vary  with  the  conditions  and  the  arrange- 
ment. In  the  report  given  in  the  present  chapter  it 
will  be  noted  that  the  fiscal  agents  receive  fifteen  per 
cent,  of  the  gross  proceeds.  In  some  of  the  easier 
flotations  the  percentage  may  be  less.  As  a  rule,  how- 
ever, it  will  be  at  least  fifteen  per  cent,  and  frequently 
much  more,  particularly  when  the  financial  agent  ad- 
vances money  for  the  preliminary  expenses  of  the 
campaign,  as  is  occasionally  done.  His  work  is  of 
the  greatest  importance,  requires  skill  and  experience, 
and  demands  and  receives  a  fair  compensation. 

The  newspaper  or  magazine  advertising  of  a  public 
presentation  is  usually  intended  to  be  merely  the  first 
step  towards  the  sale  of  stock.  If  the  advertising  is 
successful,  some  few  subscriptions  will  be  received  in 
direct  response,  but  these,  though  welcome,  are  en- 
tirely incidental,  the  main  object  of  the  advertising 


PUBLIC    PRESENTATION.  39 1 

being  to  secure  the  names  of  people  who  are  interested, 
or  who  may  be  interested  in  the  investment.  Subse- 
quent efforts  are  then  required  to  work  this  interest 
up  and  turn  it  into  stock  subscriptions. 

It  would  of  course  be  very  advantageous  if  subscrip- 
tions could  be  secured  at  any  reasonable  cost  in  direct 
response  to  advertising  in  the  public  prints.  The 
"follow-up"  involves  trouble,  expense  and  delay,  and 
if  avoided  the  saving  would  be  material.  To  this  end 
advertising  is  sometimes  framed  on  mail  order  lines, 
the  idea  being  to  make  the  presentation  so  complete 
or  so  satisfactory  in  itself  that  the  reader,  instead  of 
sending  for  circulars  or  further  particulars,  will  at 
once  forward  his  subscription.  The  attempt  is  but 
seldom  successful.  A  fairly  complete  presentation, 
requiring  considerable  very  costly  advertising  space, 
is  usually  necessary  to  produce  such  results,  and  it 
is  but  rarely  that  the  advertiser  has  this  space  at 
command  or  could  produce  results  that  would  justify 
its  cost  if  he  had. 

Occasionally,  it  must  be  admitted,  an  advertisement 
of  moderate  size  is  seen  in  which  the  presentation  is 
made  so  concisely  and  yet  effectively  that  it  does  pro- 
duce direct  subscriptions.  On  the  other  hand,  ad- 
vertisers sometimes  disregard  the  limitations  of  cost, 
and  print  what  is  practically  a  complete  prospectus 
in  the  advertising  pages  of  magazines  or  other  suita- 
ble publications.  This  is  done  on  the  assumption  that 
direct  subscriptions  will  be  secured  and  that  the  elimi- 
nation of  the  delay  and  expensive  follow-up  work 
thereby  effected  justifies  the  somewhat  excessive  ex- 
penditure. 


392  FINANCING   AN    ENTERPRISE. 

It  may  be  said  generally  that  any  advertising  that 
pays  is  good  advertising,  but  the  wisdom  and  economy 
of  making  a  full  presentation  of  the  offering — unless 
it  can  be  briefly  done — in  the  costly  advertising  pages 
of  newspapers  and  magazines,  is  always  a  matter  of 
grave  doubt.  Advertising  in  any  desirable  medium 
seldom  runs  less  than  $ioo  a  page,  and  ranges  upward 
from  this  minimum  to  the  thousand  or  more  dollars 
paid  the  newspapers  of  the  larger  cities  for  page  ad- 
vertisements in  their  Sunday  editions.  It  is  obvious 
that  in  any  legitimate  enterprise  the  subscription  re- 
turns must  be  very  large  to  justify  such  a  presentation 
cost,  and  in  practice  such  results  are  not  often  secured. 

If  the  attempt  is  to  be  made,  the  Sunday  newspaper 
— the  most  expensive  advertising  of  the  kind — will 
probably  produce  the  best  results.  It  is  but  seldom, 
if  ever,  that  the  extended  presentations  which  appear 
on  occasion  in  the  monthly  magazines  are  profitable. 
The  lengthy  and  interesting  prospectus  of  the  Cash 
Buyers'  Union,  which  appeared  some  years  ago  in 
the  advertising  pages  of  some  of  our  popular  maga- 
zines, affords  an  excellent  example  of  an  attempt  of 
this  kind.  The  presentation  occupied  from  eight  to 
ten  pages  and  hardly  cost  less  than  $ioo  a  page  in 
the  cheaper  mediums.  In  the  better  mediums  the  cost 
was  much  greater.  The  ensuing  bankruptcy  of  the 
concern  with  net  liabilities  stated  to  be  over  $1,000,000 
was  to  be  anticipated,  not  as  a  direct  result  of  this 
advertising,  but  as  the  general  result  of  the  extrava- 
gant and  reckless  management  of  which  such  adver- 
tising is  apt  to  be  indicative. 

The   advertising  of   a   public   presentation   usually 


PUBLIC    PRESENTATION.  393 

includes  a  request  to  send  for  a  prospectus  or  other 
printed  matter.  Sometimes  responses  are  encouraged 
by  special  inducements.  A  mining  enterprise  will 
offer  to  send  samples  of  ore  to  all  applicants  for  its 
prospectus;  a  plantation  company  will  give  handsome 
photographs  of  its  property;  other  advertisers  will 
include  some  publication  of  small  cost  but  attractive 
title,  as  "How  Money  is  Made,"  "The  Road  to  For- 
tune," "The  Investor's  Guide,"  "The  Gates  of  Gold," 
etc.,  etc.,  the  whole  object  being  to  attract  attention 
and  interest  people  to  the  point  of  sending  in  their 
names. 

It  is  doubtful  whether  inducements  of  a  popular 
nature,  such  as  samples  of  ore  or  photographs,  are 
ever  advantageous.  It  is  almost  certain  that  at  times 
they  are  distinctly  the  reverse.  Many  people  respond 
merely  for  the  sake  of  securing  the  offered  induce- 
ments without  the  least  interest  in  the  underlying  en- 
terprise or  in  investments  generally.  In  such  cases 
the  names  are  of  no  more  value  than  if  they  were 
copied  at  far  less  expense  from  some  public  directory. 

Booklets  of  the  kind  mentioned,  which  appeal  di- 
rectly to  the  classes  of  people  to  be  reached,  i.  e.,  in- 
vestors, are  much  better.  Even  though  the  party 
responding  writes  merely  to  secure  the  booklet,  it  is 
a  fair  presumption  that  he  is  interested  in  investments 
generally  and  may  by  judicious  treatment  be  inter- 
ested in  the  particular  investment  under  consideration. 

A  name  secured  in  response  to  advertising  is  a  far 
more  valuable  property  than  one  obtained  from  a 
purchased  list.  It  presumably  represents  a  fresh  "un- 
worked"  enquirer — a  prospective  investor  looking  for 


394  FINANCING   AN    ENTERPRISE. 

an  investment  and  already  interested  in  the  particular 
enterprise.  The  apphcation  is  therefore  treated  with 
all  due  consideration.  Usually  a  fac-simile  or  circular 
letter  accompanied  by  a  prospectus  is  sent  at  once  to 
the  enquirer.  An  order  blank  and  return  envelope  are 
also  enclosed  with  these.  Occasionally,  in  addition  to 
the  material  mentioned,  a  mass  of  other  printed  matter 
is  included.  This,  however,  is  apt  to  be  prejudicial, 
as  too  much  material  is  unattractive  and  confusing, 
requiring  study  in  order  to  fit  each  piece  in  its  proper 
place  and  preventing  that  easy  assimilation  of  the 
whole  presentation  which  is  desirable.  The  addition 
of  a  map  or  report  or  special  proposition  is  good  if 
it  strengthens  or  adds  interest  to  the  presentation,  but 
not  otherwise.  As  a  rule,  any  presentation  material, 
outside  the  fac-simile  letter,  should  be  incorporated 
in  the  prospectus.  Or,  if  not  closely  enough  connect- 
ed to  appear  in  the  body  of  the  prospectus,  this  other 
matter  may  be  bound  up  with  it  in  the  form  of  ex- 
hibits. It  is  hardly  necessary  to  add  that  printing 
and  paper  should  be  at  least  good  enough  to  be  at- 
tractive, that  each  piece  of  matter  should  be  neatly 
folded,  and  that  the  whole  should  present  a  clean 
business-like  appearance  and  be  "confidence-inspiring." 
The  inclusion  of  an  order  blank  and  return  envelope 
is  almost  invariable  and  is  advisable  on  the  general 
principle  that  anything  is  good  which  makes  it  easier 
for  the  recipient  to  send  in  his  subscription.  Nothing 
is  so  dangerous  as  delay  when  an  investor's  mind  has 
once  reached  the  subscril)ing  point.  The  general  mot- 
to of  present-day  advertising  is  "Do  it  now,"  and  the 
mere  fact  that  tlic  party  has  no  envelope  at  hand,  or 


PUBLIC    PRESENTATION.  395 

cannot  find  a  sheet  of  letter  paper  is  quite  sufficient 
to  defer  a  subscription,  and  a  deferred  subscription 
so  frequently  means  a  lost  subscription  that  every  care 
should  be  taken  to  prevent  postponements.  The  re- 
turn envelope  is  sometimes  stamped  as  a  means  to  this 
end.  The  practice  is  of  doubtful  value.  It  is  expen- 
sive and  is  too  obviously  and  anxiously  a  smoothing 
of  the  way. 

If  the  prospectus  and  accompanying  material  sent 
out  to  an  enquirer  produce  no  result,  they  are  followed 
up  and  supplemented  from  time  to  time  by  follow-up 
letters  or  other  printed  matter.  The  follow-up  letters 
are  usually  sent  out  at  intervals  of  a  few  weeks.  Their 
composition  afifords  unlimited  room  for  skill,  as  results 
are  directly  dependent  upon  the  excellence  of  the  let- 
ters. Sometimes  the  follow-up  letter  will  be  an  actual 
personal  letter,  and  this  is  particularly  desirable  where 
any  special  reasons  or  local  conditions  may  thereby 
be  brought  to  bear  upon  the  particular  enquirer. 

When  form  letters  are  used  every  effort  is  made  to 
give  them  a  personal  tone.  The  body  of  the  letter 
will  be  a  faithful  reproduction  of  a  typewritten  letter. 
The  signature  at  the  end  will  either  be  actually  written 
with  pen  and  ink,  or  else  be  printed  in  fac-simile  so 
as  to  give  a  faithful  reproduction  of  a  real  signature. 

Nor  does  the  personalization  of  the  letter  stop  here. 
At  times  in  the  preparation  of  such  a  letter  the  first 
and  last  paragraphs,  or  perhaps  some  intermediate 
paragraph,  will  be  omitted  entirely  and  be  written  in 
at  the  time  the  letter  is  used,  some  local  name  or 
reference  being  introduced.  A  suitable  blank  will  also 
be  left  here  and  there  in  the  body  of  the  letter  for 


39^  FINANCING    AN    ENTERPRISE. 

the  insertion  of  the  name  of  the  party  addressed  or 
for  some  reference  to  the  town  or  village  in  which 
he  lives. 

When  such  a  letter  is  skilfully  filled  in,  it  may  not 
perhaps  deceive  the  elect,  but  it  sometimes  has  them 
puzzled. 

The  number  of  follow-up  letters  sent  will  vary  with 
the  conditions,  with  the  enterprise,  the  results  secured 
and  the  ideas  or  practice  of  the  particular  concern. 
Sometimes  an  enterprise  will  in  a  short  time  secure 
all  the  money  it  needs,  and  then  follow-up  letters  will 
naturally  cease.  Usually  at  least  half  a  dozen  such 
letters  will  be  sent  at  proper  intervals  before  a  name 
is  dropped.  In  continuing  enterprises,  or  in  the  case 
of  a  concern  which  finances  successive  enterprises, 
follow-up  letters  and  printed  matter  will  sometimes 
be  sent  to  an  enquirer  for  years  before  his  name  is 
"killed,"  even  though  after  the  first  enquiry  no  re- 
sponse has  ever  been  received. 

Of  the  value  of  the  follow-up  letter  there  can  be 
no  question.  Ordinarily  if  an  enquirer  is  willing  to  go 
to  the  trouble  and  expense — trifling  though  it  may  be 
— of  responding  to  an  advertisement,  he  is  almost  cer- 
tainly interested.  It  is  true  that  if  injudicious  induce- 
ments are  offered,  such  as  free  samples  of  ore,  pictures, 
etc.,  an  avalanche  of  responses  are  likely  to  be  secured 
from  people  who  neither  have  the  desire  nor  the  money 
to  invest  and  who  are  therefore  not  worth  following 
up.  Also  in  all  cases  there  will  be  some  few  responses 
from  people  impelled  by  mere  curiosity  or  a  general 
desire  to  keep  in  touch  with  work  of  this  kind,  and 
these   names   are  likewise   of  but   little   value.      The 


PUBLIC    PRESENTATION.  397 

great  majority  of  responses  will,  however,  be  from 
parties  who  either  are  interested  or  who  may  be  in- 
terested, and  a  list  of  names  so  secured  is  of  people 
who  have  money  to  invest  and  who  are  looking  for 
investments. 

These  names  are  choice  names  and  a  failure  to 
respond  to  the  first  appeal  is  not  even  a  discouraging 
symptom.  A  thousand  reasons  may  account  for  the 
first  failure.  The  presentation  may  not  have  been 
sufficiently  attractive;  the  terms  may  not  have  been 
quite  right;  other  demands  may  have  diverted  the 
immediate  funds  intended  for  investment ;  the  enquiry 
may  have  been  made  with  a  view  to  the  future;  the 
matter  may — as  is  often  the  case — have  been  post- 
poned temporarily,  or  the  party,  while  favorably  im- 
pressed, may  not  have  been  interested  to  the  point  of 
investing. 

In  any  of  these  or  in  many  other  cases  that  arise, 
the  follow-up  letter  may  produce  results.  Not  know- 
ing just  what  the  difficulty  is  in  each  particular  case, 
these  letters  can  only  strike  at  it  in  a  general  way. 
The  various  letters  should,  however,  take  the  matter 
up  from  different  standpoints  and  each  letter,  if  skil- 
fully prepared,  should  meet  the  objections  of,  and 
succeed  in  interesting  a  certain  number.  A  general 
"whoop-'em-up"  letter  will  sometimes  decide  the  hesi- 
tating. An  offer  of  special  terms  of  payment  may 
bring  in  a  number  more.  An  offer  to  reserve  a  cer- 
tain number  of  shares  before  the  price  of  these  shares 
is  raised  may  prove  attractive  to  others.  At  all  times 
a  letter  announcing  progress  or  new  facts  of  material 
advantage  is  good.     Sometimes  a  follow-up  letter  will 


398  FINANCING   AN    ENTERPRISE. 

be  sent  enquiring  directly  why  no  response  has  been 
received  to  preceding  communications.  Such  a  letter 
is  sometimes  excellent,  but  must  be  very  tactful  and 
courteous  to  produce  good  results.  If  otherwise,  it  is 
almost  sure  to  be  offensive,  and  is  then  much  worse 
than  no  letter. 

It  is  to  be  borne  in  mind  that  follow-up  letters, 
if  not  prepared  with  skill,  or  if  too  frequent,  are  apt 
to  become  irritating  and  have  exactly  the  reverse  of 
the  effect  intended.  In  one  case  known  to  the  writer, 
no  less  than  twelve  follow-up  letters  were  received  in 
as  many  weeks.  The  letters  were  not  bad,  but  there 
were  too  many  of  them.  The  first  effect  of  this  hot 
pursuit  was  irritation,  changing  later  to  amusement. 
Neither  effect  was  good.  When,  however,  the  follow- 
up  letter  is  not  too  long,  is  well  prepared,  is  of  interest, 
not  too  frequent,  and,  above  all,  is  good-natured  or 
business-like  in  its  tone,  the  results  are  almost  always 
good.  With  a  suitable  list  of  names,  a  good  follow-up 
letter  to  the  second  or  third  edition,  and  even  further, 
should  bring  profitable  results. 

Various  devices  are  used  to  reinforce  the  printed 
matter  and  increase  the  general  effectiveness  of  an 
advertising  campaign.  One  very  familiar  plan  is  to 
fix  a  certain  date  for  an  increase  in  the  price  of  stock. 
Frequently  this  is  an  arbitrary  advance  at  an  arbitrary 
date,  though  of  course  founded  on  the  assumption  that 
the  development  of  values  behind  the  stock  justifies 
the  increase.  However  this  may  be,  it  is  announced 
that  on  a  certain  date  the  increased  price  of  stock 
will  be  effective  and  the  purchasers  are  besought  to 
enter  the  fold  before  their  entrance  is  made  difficult 


PUBLIC   PRESENTATION.  399 

by  the  higher  price.  Usually  about  the  date  for  the 
advanced  price  to  become  effective,  a  follow-up  letter 
gives  notice  of  the  imminence  of  this  increase,  but 
also  states  that  stock  will  be  reserved  at  the  old  price 
for  anyone  making  immediate  application,  payment  to 
be  made  within  some  specified  time,  as  in  thirty,  sixty 
or  ninety  days. 

At  the  appointed  time  the  price  is  raised.  As  a  rule 
purchasers  coming  in  within  a  very  short  time  there- 
after— if  they  will  not  pay  the  advanced  price — are 
slipped  through  on  the  old  basis.  The  general  sale 
goes  on,  however,  at  the  higher  level  and  the  increased 
price  is  pointed  to  as  absolute  and  final  proof  of  the 
solidity  of  the  enterprise  and  the  profits  accruing  to 
its  stockholders.  After  a  decent  interval  another 
raise  is  announced  and  the  campaign  again  swings 
round  the  same  interesting  and  effective  circle. 

The  report  printed  in  the  preceding  chapter  affords 
a  very  graphic  exposition  of  this  practice,  showing 
both  the  manner  and  the  results.  As  will  be  noted, 
sales  began  at  one  cent  a  share,  at  which  price  the 
largest  number  of  shares  were  sold.  The  largest  re-, 
ceipts,  however,  came  from  the  sale  of  stock  at  two 
cents  a  share.  This  is  probably  due  to  the  fact  that 
the  price  of  stock  was  then  still  at  an  attractive  figure 
while  the  increase  in  price  had  given  confidence  in 
its  future.  From  two  cents,  as  will  be  seen,  the  stock 
went  to  three  cents,  five  cents,  six  cents  and  finally 
to  ten  cents  a  share,  good  results  being  secured  at  each 
of  these  advanced  prices,  though  not  at  all  equal  to 
the  results  of  the  first  offerings  at  one  and  two  cents. 

Such   increased  prices  are  usually  justified — nomi- 


400  FINANCING   AN    ENTERPRISE. 

nally  at  least — by  the  improved  conditions  of  the  en- 
terprise or  by  new  discoveries  made,  as  a  pay  streak 
or  a  rich  pocket  in  a  mine,  or  by  the  acquisition  of  a 
new  or  competing  invention,  or  the  closing  of  a  profit- 
able contract  in  an  industrial  enterprise.  Sometimes, 
however,  they  are  justified  by  the  mere  fact  that  the 
enterprise  has  been  widely  advertised,  that  money  has 
been  secured  for  the  treasury,  that  a  market  has  been 
created  for  its  stock  and  that,  therefore,  the  stock  is 
worth  more  than  before. 

As  a  stock-selling  measure  the  plan  is  common 
and  effective  and  can  hardly  be  condemned. 

Another  favorite  device  for  the  furtherance  of  stock 
sales  is  to  announce  the  conclusion  of  the  sale.  The 
following  announcement  of  this  kind  is  taken  from  the 
recent  circular  of  a  house  dealing  in  one  of  the  wire- 
less telegraph  stocks :  "This  is  absolutely  our  last  offer 
of  these  securities  at  this  price.  There  will  be  no 
more  for  sale.  You  will  do  well  to  take  advantage 
of  this  final  opportunity  and  order  all  you  can  possibly 
take  at  our  price  of  $7  per  certificate." 

The  general  idea  of  such  an  offer  is  entirely  proper 
and  is  frequently  an  effective  measure,  but  in  this 
particular  instance,  as  the  same  stock  was  then  being 
offered  and  is  still  offered  quite  freely  on  the  open 
market  at  figures  much  less  than  those  of  the  pro- 
moters, their  final  offer  seemed  to  be  lacking  both  in 
inducement  and  in  satisfactory  conclusiveness.  Too 
many  "last  appearances"  tend  to  destroy  confidence. 

In  connection  with  a  public  advertising  campaign 
of  the  kind  under  discussion,  it  is  not  unusual  for 
the  fiscal  agents  or  other  parties  in  charge  to  appoint 


PUBLIC    PRESENTATION.  4OI 

selling  agents  in  different  parts  of  the  country,  who 
will  call  upon  enquirers  and  endeavor  to  secure  their 
subscriptions.  The  effect  of  personal  work  of  this 
kind  is,  of  course,  much  better  than  printed  matter 
alone  if  the  agents  are  men  of  ability,  though  occa- 
sionally people  object  to  this  "follow-up"  method. 
When  agents  are  employed  the  names  of  enquirers 
in  their  territory  are  sent  to  them  as  received  at  the 
central  office.  These  enquirers  are  then  usually  left 
entirely  to  the  agent  for  subsequent  work,  though  if 
the  agent  is  unsuccessful,  follow-up  letters  and  printed 
matter  are  sometimes  again  sent  from  the  central  office 
to  these  hard-headed  enquirers. 

Sometimes  the  financing  of  speculative  enterprises 
is  carried  on  mainly  or  entirely  by  means  of  these 
agents.  Usually,  however,  advertising  is  also  carried 
on  to  assist  and  reinforce  their  work.  When  this  is 
not  the  case,  the  agents  who  have  the  matter  in  hand 
must  of  necessity  either  be  men  possessing  a  circle  of 
friends  or  acquaintances  to  whom  they  can  present 
the  matter,  or  otherwise  be  capable  of  securing  access 
to  desirable  parties.  The  whole  presentation  then  be- 
comes one  of  personal  appeal  governed  by  the  same 
principles  as  in  any  other  private  presentation.  The 
method  is  effective  but  is  expensive  and  could  hardly 
be  satisfactorily  used  for  the  financing  of  a  single 
enterprise. 

Such  methods  are  usually  employed  by  concerns 
which  finance  one  enterprise  after  another,  the  same 
machinery  being  used  for  all.  In  such  case  an  at- 
tractive enterprise  is  taken  up,  capitalized  liberally 
and  the  stock  placed  for  sale  in  the  hands  of  these 


402  FINANCING   AN    ENTERPRISE. 

canvassers.  These  agents  are  usually  supplied  with 
effective  printed  matter,  and  the  details  of  the  cam- 
paign are  left  in  their  hands,  subject  only  to  general 
supervision  and  direction  from  the  central  office. 

In  conclusion  it  may  be  said  that  the  field  of  financ- 
ing by  public  presentation,  whether  the  campaign  be 
by  circular  letter,  by  agents,  by  the  usual  advertising 
methods  or  by  any  combination  of  these,  is  extensive. 
There  is  practically  unlimited  money  ready  for  invest- 
ment if  it  can  be  reached  in  the  right  way.  The 
method,  however,  requires  an  attractive  proposition, 
a  skilful  presentation  and  favorable  conditions.  All 
of  these  must  be  present,  and  even  then  success  is  not 
always  attained. 

Sears,  Roebuck  &  Company,  the  mail  order  house 
of  Chicago,  afforded  an  unusually  good  illustration  of 
a  successful  public  presentation  of  stock.  This  busi- 
ness was  incorporated  under  the  laws  of  New  York 
State  with  a  capital  of  $40,000,000,  of  which  $10,000- 
000  is  a  seven  per  cent,  cumulative  preferred  stock, 
redeemable  at  any  time  upon  payment  of  one  hundred 
and  twenty-five  per  cent.  This  preferred  stock  was 
offered  largely  in  New  York  City  at  a  price  of  ninety- 
seven  and  one-half  per  cent,  with  accrued  dividends 
from  July  ist,  1906. 

In  this  case  the  securities  possessed  no  speculative 
attraction,  and  whether  they  had  sufficient  solidity, 
convertibility  and  fixed  return  to  appeal  to  the  con- 
servative investor  was  then  doubtful.  The  offer  was 
first  made  by  circulars  sent  to  selected  names.  This 
was  followed  by  a  general  presentation  in  the  public 
prints.    The  campaign  was  managed  with  considerable 


PUBLIC    PRESENTATION.  403 

skill,  and  if  any  difficulties  were  encountered  they 
were  due  to  the  nature  of  the  offering,  not  to  deficien- 
cies of  the  presentation.  The  sul)scquent  history  of 
the  company  has  justified  the  ])ul)lic  confidence  with 
which  its  stock  was  received. 


PART  VI.     SPECIAL  FEATURES  OF 
PROMOTION. 


CHAPTER  XXXV. 
TRUST  FUND  GUARANTEES. 


In  the  promotion  of  speculative  enterprises,  and 
particularly  in  the  promotion  of  mining  enterprises, 
various  methods  of  avoiding  or  diminishing  the  risk 
to  the  individual  investor  have  been  sought, — not  usu- 
ally out  of  regard  to  the  investor,  but  to  add  to  the 
attractiveness  of  the  enterprise.  Of  the  methods  now 
in  use  the  best  known  are  those  termed  the  "trust 
fund"  and  "guaranteed  stock,"  both  having  the  same 
general  object  of  reducing  the  investment  risk. 

In  passing  it  may  be  said  that  these  terms,  when 
used  in  their  "promoting"  sense,  do  not  carry  the 
real  weight  and  safety  supposed  to  characterize  the 
same  terms  when  used  in  general  finance.  They  were 
presumably  selected  for  the  reason  that  they  do  bear 
some  likeness  to  their  distant  relatives  of  ordinary 
finance,  and  because  they  do  have  a  conservative  and 
confidence-inspiring  sound. 

In  the  general  consideration  of  these  alleged  protec- 
tive measures — the  so-called  "trust  fund"  and  "guar- 

404 


TRUST  FUND  GUARANTEES.  405 

anteed  stock" — it  is  assumed  that  they  are  employed 
and  made  effective  in  good  faith.  It  is  certain  that 
in  many  cases  these  assumed  conditions  do  not  obtain. 
It  is  equally  true  that  this  improper  employment  of 
the  devices — which  are  legitimate  enough  in  them- 
selves— has  brought  them  into  an  odium  and  disre- 
pute v^hich  is  not  entirely  merited. 

The  "trust  fund"  is  a  form  of  industrial  insurance 
sometimes  used  by  promoting  concerns  for  the  pur- 
pose of  protecting  or  guaranteeing  their  investors. 
These  concerns  make  a  practice  of  taking  up  and 
floating  one  speculative  enterprise  after  another. 
They  usually  pose  as  financial  agents  of  the  enterprises 
exploited.  They  might  perhaps  be  more  correctly 
designated  as  owners  and  promoters,  as  the  enter- 
prises are  usually,  in  fact  if  not  in  name,  their  own. 

The  general  plan  of  the  trust  fund  is  as  follows: 
Each  enterprise  taken  up  by  the  concern  employing 
the  device  is  capitalized  at  a  liberal  figure.  This  capi- 
talization is  rendered  "full-paid  and  non-assessable" 
— in  name  at  least — by  its  issue  in  exchange  for  the 
patents,  mines  or  other  property  forming  the  basis 
of  the  enterprise.  A  portion  of  the  stock — usually 
termed  "promotion  stock" — is  retained  by  the  owners 
or  promoters.  A  portion  is  returned  to  the  treasury 
to  be  sold  in  securing  money  for  the  development 
of  the  enterprise,  or  for  other  company  purposes.  Any 
special  demands  upon  the  stock  are  then  satisfied  and 
the  remainder  is  reserved  for  the  alleged  protection 
of  the  concern's  investors.  This  is  the  so-called  "trust 
fund." 

The  proportion  of  stock  reserved  for  this  trust  fund 


406  FINANCING   AN   ENTERPRISE. 

varies  with  the  conditions  of  the  particular  fund.  It 
is  presumable,  however,  that  as  the  managing  concern 
is  generally  the  "residuary  legatee"  of  the  trust  fund, 
the  proportion  reserved  will  be  liberal.  Each  enter- 
prise capitalized  contributes  in  this  way  its  quota  to 
the  trust  fund.  Then  if  any  one  of  the  enterprises 
fails  or  is  not  sufficiently  profitable  to  justify  further 
operations,  that  enterprise  is  dropped  and  its  out- 
standing stock  is  replaced  with  some  other  stock — 
either  of  demonstrated  value  or  of  undemonstrated 
worthlessness — taken  from  the  trust  fund. 

The  amount  of  the  trust  fund,  the  methods  of  its 
application,  the  disposition  of  any  dividends  accru- 
ing, and  the  other  details  will  of  course,  lying  as 
they  do  entirely  within  the  province  and  absolutely 
within  the  discretion  of  the  concerns  creating  them, 
vary  materially  in  different  cases.  The  general  plan 
is,  however,  the  same,  stock  of  each  concern  financed 
being  reserved  for  the  protection  of  the  investors  of 
the  general  series.  From  one  point  of  view  this  re- 
serve is  really  a  trust  fund,  being  held  by  the  concern 
creating  it  in  trust — to  a  greater  or  less  extent — 
for  the  general  benefit  of  stockholders  in  the  particular 
chain  of  enterprises. 

The  usual  claims  of  jiromoting  concerns  as  to  the 
effect  of  the  trust  fund  are  as  absurd  as  they  are 
irresponsible.  At  the  same  time  the  basic  idea  of  the 
trust  fund  is  neither  unsound  nor  improper.  If  a 
number  of  enterprises  are  selected  with  the  care  and 
scientific  knowledge  that  would  be  easily  possible  to 
a  strong,  well-equipped  concern,  and  if  these  enter- 
prises are  at  all  well  managed,  it  is  obvious  that  a 


TRUST   FUND  GUARANTEES.  4O7 

proportion  will  be  successful.  Also  as  these  enter- 
prises are  of  a  speculative  nature  it  is  probable  that 
the  successful  ones  will  be  largely  profitable.  It  is 
clear,  then,  that  if  any  reasonable  proportion  of  the 
stock  of  each  one  is  reserved  and  held  as  a  protection 
against  the  failure  of  any  one  or  more  of  the  enter- 
prises, the  risks  of  the  investors  in  each  particular 
enterprise  fostered  by  that  concern  will  be  much  di- 
minished. So  far  the  scheme  is  good  and  to  be 
commended. 

It  will  be  recognized,  of  course,  that  a  trust  fund 
composed  of  worthless  stocks  is  of  no  protection  to 
anyone,  and  when  so  constituted,  as  seems  to  be  the 
case  in  several  prominent  examples  of  its  use,  it  is 
nothing  more  than  an  ordinary,  or  extraordinary, 
swindle.     Such  funds  are  not  considered  here. 

Even  when  it  is  honestly  constituted,  however,  there 
are  in  practice  points  of  disadvantage  connected  with 
the  trust  fund  that  do  not  appear  at  first  sight.  The 
most  important  of  these  relate  to  the  methods  by  which 
the  fund  is  held,  to  the  limited  security  it  affords  and 
to  the  diminution  of  general  profits  when  it  is  em- 
ployed. 

Trust  funds  of  the  nature  under  consideration  are 
in  most  cases  held  and  managed  by  the  promoting 
concern  which  creates  them.  This  control  is  usually 
absolute.  The  restrictions  under  which  the  fund  is 
held  are  determined  and  fixed  by  the  holding  concern. 
If  these  are  good  and  the  particular  concern  admin- 
isters the  trust  fairly,  the  fund  may  be  a  very  excel- 
lent institution.  If,  however,  the  proper  restrictions 
or  regulations  are  not  provided,  and  the  concern  in 


408  FINANCING   AN    ENTERPRISE. 

charge  is  disposed  to  administer  the  fund  unfairly  or 
even  improperly,  the  opportunity  is  there. 

Under  these  conditions  the  questions  naturally  arise 
when  any  investment  protected  by  a  trust  fund  is 
under  consideration — what  are  the  exact  rights  of 
stockholders  in  this  fund,  or  have  they  any  absolute 
rights,  and  if  so,  what  assurance  have  they  that  these 
rights  will  be  recognized?  The  answer  to  these  ques- 
tions is  but  seldom,  if  ever,  as  explicit  as  would  be 
desirable.  In  most  cases  it  is  lamentably  evasive  and 
deficient. 

Not  only  are  the  general  conditions  of  the  trust 
fund  and  the  status  of  its  "protected"  stockholders 
uncertain,  and  therefore  unsatisfactory,  but  in  most 
cases  the  controlling  concern  is,  as  already  stated,  the 
residuary  legatee  of  the  fund.  In  other  words,  any 
stock  or  cash  of  the  trust  fund  not  paid  out  in  the 
protection  of  stockholders  ultimately  reverts  to  it. 
Every  dollar  kept  from  the  stockholders  comes  into 
the  hands  of  the  concern.  We  then  have  the  spectacle 
of  a  trustee  in  absolute  control  whose  interests,  in 
part  at  least,  are  directly  opposed  to  those  of  the 
parties  for  whom  this  trustee  is  acting.  Obviously 
the  conditions  are  not  such  as  to  create  any  great 
amount  of  confidence  either  in  the  trust  fund  or  in  its 
trustee. 

It  is  not  at  all  improper  that  the  controlling  concern 
should  be  the  residuary  legatee  of  the  trust  fund.  It 
would  seem  perhaps  fairer  that  any  remainder  should 
revert  to  the  stockholders  of  the  protected  enterprises, 
but  the  reversion  to  the  managing  concern  is  legiti- 
mate if  so  arranged  and  agreed  to  by  those  interested, 


TRUST   FUND   GUARANTEES.  4O9 

and  does  to  some  extent  serve  as  an  incentive  to  a 
careful  selection  of  properties  for  development  and  a 
conservative  management  thereafter.  The  uncon- 
trolled administration  of  this  fund  by  the  managing 
concern  is,  however,  grossly  improper  and  sufficient 
in  itself  to  cast  suspicion  on  the  whole  arrangement. 

As  to  diminution  of  profits  we  come  to  the  general 
proposition  that  obtains  in  any  form  of  insurance,  that 
any  protection  secured  must  be  paid  for.  In  the  case 
of  the  trust  fund  it  is  obvious  that  if  it  is  to  be  effective 
a  considerable  proportion  of  the  stock  of  each  enter- 
prise must  be  reserved,  and  this  necessitates  an  in- 
creased capitalization. 

Ordinarily  the  capitalization  of  a  speculative  enter- 
prise is  large.  Stock  must  be  issued  for  the  properties 
secured,  promoter's  profits  must  be  provided  for,  and 
sufficient  stock  must  be  reserved  for  sale  to  cover  the 
heavy  expenses  of  financing  and  to  produce  an  ade- 
quate operating  capital.  When  the  trust  fund  is  em- 
ployed, in  addition  to  these  ordinary  requirements, 
its  reservation  must  also  be  included.  The  company 
is  therefore  capitalized  at  a  materially  higher  figure 
than  would  otherwise  be  necessary,  and  as  the  value 
of  each  share  is  thereby  decreased,  each  individual 
stockholder  involuntarily  contributes  his  pro  rata  to 
the  trust  fund  reservation  and  thereby  pays  for  its 
protection.  That  is,  if  he  buys  10,000  shares  in  the 
"protected"  company — shares  being  $1  each — instead 
of  getting  10,000  shares  in  a  company  capitalized  at 
perhaps  $1,000,000,  he  gets  10,000  shares  in  a  com- 
pany capitalized  at  perhaps  $1,200,000  or  $1,500,000, 
this  larger  capitalization  being  imposed  upon  the  cor- 


4IO  FINANCING    AN    ENTERPRISE. 

poration  in  order  to  allow  for  the  trust  fund  reser- 
vation. In  other  words,  instead  of  getting  i-iooth 
of  the  whole  capitalization  for  his  money,  he  gets 
i-i20th  or  i-i50th.  His  interest  in  the  mine  or  other 
subject  matter  of  the  enterprise  is  therefore  smaller 
than  would  otherwise  have  been  the  case,  and  of  course 
his  participation  in  dividends  is  diminished  in  an  equal 
proportion. 

It  is  also  to  be  noted  that  usually  when  a  trust  fund 
is  created  the  capitalizations  of  the  protected  enter- 
prises are  not  increased  solely  by  the  amount  reserved 
for  the  trust  fund,  but,  on  the  mere  strength  of  having 
a  trust  fund,  are  jumped  up  arbitrarily  to  an  unneces- 
sarily high  figure.  This  "unearned  increment,"  it  is 
only  fair  to  presume,  inures  to  the  benefit  of  the  pro- 
moters and  financial  agents  of  the  enterprise. 

In  any  case  it  will  be  seen  that  the  "financial  agent" 
or  the  concern  managing  the  matter  does  not  in  any 
way  bear  the  burden  of  this  trust  fund — except  possi- 
bly as  a  stockholder  of  some  or  all  of  the  enterprises 
— but  that  it  falls  entirely  on  the  stockholders  them- 
selves. That  is,  these  latter  get  a  certain  amount 
of  insurance  and  they  pay  for  it.  Whether  they  pay 
more  than  its  worth  is  difficult  if  not  impossible  for 
the  ordinary  stockholder  to  tell,  as  the  matter  could 
only  be  determined  by  an  "inside"  and  somewhat 
intricate  investigation. 

The  general  idea  of  industrial  insurance  involved 
in  the  trust  fund  is  sometimes  worked  out  on  a  differ- 
ent and  simpler  basis.  Under  the  trust  fund  arrange- 
ment the  concern  in  charge  takes  up  a  number  of 
different  enterprises  and  capitalizes  and   floats  them 


TRUST   FUND  GUARANTEES.  4II 

separately,  reserving  a  quota  of  each  capitalization  for 
the  common  protection.  Under  the  simpler  arrange- 
ment referred  to,  but  one  large  corporation  is  organ- 
ized and  the  different  enterprises  to  be  developed  are 
taken  up  by  this  one  large  concern.  Each  enterprise 
then  is  included  with  the  others  under  the  one  capitali- 
zation and  instead  of  stock  being  sold  in  each  particu- 
lar enterprise  as  under  the  trust  fund  system,  stock 
is  sold  only  in  this  main  company.  Each  stockholder 
is  therefore  interested  in  and  his  stock  is  supported 
by  every  one  of  these  enterprises. 

If  the  enterprises  of  the  large  or  exploiting  com- 
pany are  well  selected  and  no  special  ill  luck  is  en- 
countered, the  company  as  a  whole  will  be  successful. 
If  any  one  of  the  enterprises  fails,  there  are  no  indi- 
vidual stockholders  in  that  particular  enterprise  to  be 
recouped,  but  the  loss  falls  automatically  on  the  com- 
pany at  large.  In  other  words,  the  stock  held  by  each 
stockholder  is  worth  less  than  it  would  have  been  had 
that  enterprise  been  successful,  but,  being  based  on 
a  number  of  enterprises,  still  has  a  value  dependent 
on  the  value  of  those  which  still  remain.  The  plan 
is  superior  to  that  of  the  trust  fund  in  several  respects. 

It  may  seem  paradoxical,  but  under  the  usual  trust 
fund  scheme  the  original  stockholders  incur  losses 
whether  business  losses  are  sustained  or  not.  In 
other  words   they  have   to   pay   for   their   insurance. 

In  a  large  exploitation  company,  on  the  contrary, 
losses  are  automatically  adjusted  as  they  are  met. 
In  other  words  the  company  carries  its  own  insurance. 
There  is  no  reservation  of  stock  as  in  the  trust  fund; 
there  can,  therefore,  be  no  profits  on  an  over-reserva- 


412  FINANCING   AN   ENTERPRISE. 

tion  to  the  managers.  The  protection  is  more  com- 
plete, because  every  enterprise  is  pledged  to  the  limit 
of  its  value.  As  long  as  one  single  enterprise  is  a 
success,  each  stockholder  has  something  to  show  for 
his  investment. 

To  summarize  the  whole  matter  it  may  be  said  that 
the  abstract  theory  of  the  trust  fund  is  correct,  being 
an  application  of  insurance  methods  to  business  enter- 
prises. All  contribute  in  order  that  none  may  lose 
entirely,  and  the  risk  in  each  particular  enterprise  is 
thereby  to  some  extent  diminished.  In  the  large 
exploiting  company  taking  up  a  number  of  enterprises 
under  one  capitalization,  the  same  protection  is  auto- 
matically afforded,  but  with  simpler  machinery  and 
to  a  greater  extent.  In  neither  case  is  the  protection 
complete.  The  number  of  enterprises  developed  by 
even  the  largest  concern  is  small  and  a  series  of  dis- 
asters might,  under  the  trust  fund  plan,  wipe  out  the 
whole  reserve  and  remove  all  further  protection,  or, 
under  the  exploitation  company,  so  reduce  the  assets 
and  possibilities  of  the  concern  as  to  remove  all  hope 
of  adequate  profits  and  involve  its  stockholders  in  a 
more  or  less  serious  loss. 

It  may  be  said  further  that  as  a  matter  of  practice 
there  are  a  number  of  well  known  exploitation  com- 
panies now  in  successful  and  very  profitable  operation. 
These  companies  are  of  large  capitalization  and  even 
larger  assets.  They  are  of  recognized  standing,  repu- 
tation and  responsibility.  They  are  conspicuous  ex- 
amples of  success. 

On  the  other  hand,  there  is  no  single  instance  known 
to  the  writer  of  similarly  conspicuous  success  under 


TRUST    FUND   GUARANTEES.  413 

the  direct  trust  fund  plan — except,  indeed,  when  used 
as  a  means  of  swindHng-.  As  the  basic  principles  of  the 
trust  fund  are  correct,  this  practical  failure  in  operation 
can  only  be  attributed  to  the  manner  in  which  these 
principles  are  carried  out. 

It  is  obvious  that  dividends  on  stock  and  interest 
on  bonds,  as  well  as  the  bonds  themselves,  can  be 
guaranteed — as  far  as  may  be — by  this  same  trust 
fund  device.  The  principles  involved  are,  however, 
identical  with  those  already  discussed  and  require  no 
further  consideration. 


CHAPTER  XXXVI. 

GUARANTEED  STOCK,   BONDS  AND 
DIVIDENDS. 


As  stated  in  the  preceding  chapter,  the  mere  inclu- 
sion of  a  number  of  different  enterprises  under  one 
large  capitalization  gives  a  measure  of  safety  to  in- 
vestors in  the  stock  of  that  company  not  enjoyed  by 
stockholders  in  a  "one-enterprise"  company.  If  the 
enterprises  are  well  selected,  it  is  not  likely  that  all 
will  fail,  and  unless  this  occurs  the  company  itself 
cannot  be  an  entire  failure. 

Also  if  a  trust  fund  is  formed  by  the  reservation 
of  stock  from  a  number  of  different  companies  and  is 
honestly  held  as  an  insurance  reserve  to  make  good 
any  losses  resulting  from  failures  among  these  com- 
panies, a  certain  measure  of  protection  is  again  se- 
cured. 

For  the  ordinary  company  formed  to  develop  but 
one  enterprise  and  not  acting  in  conjunction  with  other 
companies,  neither  of  these  methods  of  protection  is 
available.  It  is,  however,  very  desirable  from  the 
standpoint  of  the  promoter  to  add  to  the  attractiveness 
of  the  one-enterprise  company  by  some  protection — or 
alleged  protection — for  its  prospective  stockholders, 
and  this  demand  has  led  to  the  invention  and  employ- 

414 


GUARANTEED  STOCK,  BONDS  AND  DIVIDENDS.      4I5 

ment  for  promotion  purposes  of  guaranteed  stock, 
bonds  and  dividends. 

In  conservative  finance  these  terms  mean  that  the 
stocks  or  bonds  so  designated  are  guaranteed  as  to 
principal,  interest  or  dividends  by  substantial  concerns, 
as  for  instance  when  a  connecting  railroad  is  taken 
over  by  some  trunk  line  and  the  bonds  of  the  con- 
necting road  are  actually  guaranteed  by  the  trunk  line 
as  a  part  of  the  purchase  consideration,  or  as  when 
a  subsidiary  company  issues  bonds  or  preferred  stock 
guaranteed  by  the  parent  company. 

The  guarantees  of  promotion  usually  provide  that 
at  some  future  specified  date  the  face  value  of  the 
guaranteed  stock  or  bonds  will,  on  surrender  of  the 
securities,  be  paid  to  their  legal  holders,  this  guaranty 
being  made  by  institutions  not  connected  with  the 
issuing  company.  In  the  case  of  guaranteed  bonds, 
the  guaranty  is  much  the  same  as  that  of  sounder 
finance,  usually  differing  only  in  the  standing  and 
character  of  the  guaranteeing  company.  In  the  case 
of  stock  the  guaranty  is  of  a  different  nature,  pro- 
viding that  at  some  fixed  date,  if  the  purchaser  of 
such  stock  is  not  satisfied  as  to  its  value,  he  can 
surrender  it  to  the  guaranteeing  company  and  receive 
its  full  face  value.  If  dividends  or  interest  are  guar- 
anteed the  guaranteeing  company  either  undertakes 
their  payment  absolutely  or  agrees  to  pay  such  in- 
terest or  dividends  in  case  the  issuing  company  fails 
to  do  so.  The  details  of  any  of  these  guarantees 
will,  of  course,  vary  according  to  the  arrangement  in 
each  particular  case. 

These  guarantees  are  absolute  as  far  as  they  go. 


4l6  FINANCING   AN    ENTERPRISE. 

In  the  case  of  bonds  the  guaranteeing  company  agrees 
to  pay  the  holder  the  face  value  of  his  bond  when 
due  if  the  issuing  company  does  not.  In  the  case  of 
guaranteed  stock  the  agreement  to  pay  its  face  value  at 
the  specified  time  is  also  absolute,  but  payment,  if  made 
at  all,  may  be  either  to  the  holder  of  the  stock  or  to  the 
company  which  issues  the  stock,  according  to  the  con- 
ditions. If  the  stockholder  so  elects,  payment  will 
be  made  to  him.  He  must,  however,  in  this  case, 
surrender  to  the  guaranteeing  company  the  certificates 
for  his  stock,  and  these  must  be  duly  assigned.  He 
then  receives  his  money  from  the  guaranteeing  com- 
pany, the  stock  certificates  received  by  the  guarantee- 
ing company  are  turned  over  to  the  issuing  company, 
and  the  transaction  is  closed.  If,  however,  the  stock- 
holder prefers  to  hold  his  stock  instead  of  surrender- 
ing it,  he  can  do  so,  but  then  the  money  that  would 
otherwise  have  been  paid  the  stockholder  is  paid  to  his 
company  instead,  the  guaranty  on  the  stock  lapses,  and 
the  transaction  is  again  closed. 

For  instance,  let  us  suppose  that  payment  of  a  hun- 
dred dollar  share  of  stock  is  guaranteed  at  the  end  of 
fifteen  years  from  the  date  of  issue.  The  purchaser 
will  usually  pay  the  par  value  of  $ioo  for  this  share. 
He  receives  it  under  a  guaranty  that  at  the  end  of 
fifteen  years  he  may  surrender  it  if  he  wishes  and 
receive  therefor  $ioo  in  cash.  If  at  the  end  of  the 
guaranty  period  the  stockholder  finds  the  company 
a  partial  or  total  failure,  he  will  naturally  be  glad  to 
turn  in  his  stock  and  get  back  the  amount  he  origi- 
nally paid.  Then  he  has  received  back  his  original 
investment,   surrendered  his  stock  and   is  out  of  the 


GUARANTEED  STOCK,  BONDS  AND  DIVIDENDS.      417 

game.  If,  however,  at  the  redemption  date  the  com- 
pany is  successful  and  is  paying  handsome  dividends, 
the  stockholder  will  as  naturally  prefer  to  remain  in 
the  company  and  take  his  profits.  In  this  case  he 
retains  his  stock,  the  cash  payment  of  $ioo  for  which 
the  guaranteeing  company  is  liable  is  made  to  his 
company  instead  of  to  him,  and  his  stock  is  no  longer 
guaranteed. 

Occasionally  the  terms  of  the  guarantee  will  be  so 
varied  that  the  stockholder  receives  the  guaranteed 
amount  at  the  end  of  the  specified  period  without  the 
surrender  of  his  stock.  This  is,  of  course,  a  better 
arrangement  for  the  stockholder,  but  does  not  affect 
the  principles  involved. 

In  any  case  it  will  be  observed  that  the  guaran- 
teeing company  is  to  pay  the  face  value  of  the  stock 
at  the  specified  time;  if  not  to  the  stockholder,  then  to 
the  stockholder's  company.  It  is  obvious,  therefore, 
that  some  substantial  consideration  must  be  given  to 
the  guaranteeing  company  to  induce  it  to  thus  stand 
behind  the  guaranteed  securities. 

This  consideration  consists  of  a  direct  cash  pay- 
ment, its  amount — though  much  less  than  the  amount 
called  for  by  the  guaranty — being  such  as  to  absolutely 
secure  the  guaranteeing  company  from  loss,  for  the 
simple  reason  that  at  compound  interest  it  will  by 
the  date  the  guaranteed  payment  is  due,  aggregate 
more  than  the  moneys  to  be  paid. 

The  payment  for  the  guarantee  is  made  to  the  guar- 
anteeing company  by  the  company  issuing  the  secu- 
rities. While  this  is  the  actual  procedure,  this  pavment 
in  fact  comes  out  of  the  money  given  by  the  stock- 


4l8  FINANCING   AN    ENTERPRISE. 

holder  for  his  guaranteed  stock.  The  payment  is 
usually  made  by  the  company  in  advance  of  any  sales, 
or  at  the  time  of  sale,  in  order  to  secure  the  guaran- 
teed stock  for  delivery,  but  the  company  recoups  itself 
from  the  stockholder's  money  as  soon  as  the  sale  is 
made.  This,  then,  throws  the  burden  on  the  stock- 
holder to  the  same  extent  as  if  the  payment  were 
made  directly  by  him,  so  that  in  practice  when  a 
stockholder  pays  for  a  share  of  guaranteed  stock,  a 
substantial  portion  of  his  payment  goes  to  the  guar- 
anteeing company  and  the  balance  goes  into  the  enter- 
prise. 

The  plan  is  a  most  ingenious  one.  The  terms  used 
are  familiar,  respectable  and  confidence-inspiring,  and 
the  mechanism  employed  is  unknown  to  the  ordinary 
investor  and  difficult  of  just  comprehension.  The 
following  quotation  from  the  prospectus  of  a  mining 
enterprise  shows  how  it  is  presented  to  him : 

"Guarantee  Against  Loss. 

"Any  sound-minded,  conservative  reader  of  the 
foregoing  pages  assuredly  can  not  fail  to  be  impressed 
with  the  stability  and  merit  of  the  proposition,  but 
in  order  to  remove  it  entirely  from  the  category  of 
speculative  enterprises,  we  have  added  a  special  feature 
which  eliminates  the  minutest  element  of  risk  which 
naturally  exists  in  every  business  venture,  no  matter 
how  conservative  or  well  founded. 

''Ordinarily  the  man  who  invests  in  stocks  of  any 
kind  places  his  capital  at  the  disposal  of  the  corpo- 
ration and  takes  his  chances  equally  with  others  who 
have   shown   a   similar   degree   of   confidence    in    the 


GUARANTEED  STOCK,  BONDS  AND  DIVIDENDS.      4I9 

undertaking.  Our  proposition  to  you  is  of  a  vastly 
different  character,  for  the  reason  that  while  offering 
you  an  opportunity  to  participate  equally  in  the  profits 
of  our  Company,  we  do  not  ask  you  to  assume  one 
particle  of  risk;  in  other  words,  if  the  claim  we  have 
made  and  the  plans  adopted  prove  unsuccessful,  the 
entire  amount  of  your  investment  will  be  returned 
to  you  intact. 

"After  a  most  rigid  investigation  by  experts,  ap- 
pointed to  judge  the  merits  of  our  proposition,  we 
have  succeeded  in  making  an  arrangement  with  a  well 
known  financial  institution  to  issue  us  its  gold  bonds, 
same  to  be  delivered  to  our  investors  with  their  stock 
as  an  absolute  protection  in  case  of  the  failure  of  our 
enterprise.  These  bonds  will  be  issued  in  denomina- 
tions equal  to  the  amount  of  your  investment,  payable 
at  a  specified  date.  Nothing  could  be  fairer  than 
this;  you  are  sure  of  the  return  of  your  principal  in 
any  event." 

It  is  a  fair  presumption  that  the  "rigid  investigation 
by  experts"  of  the  foregoing  quotation  is  drawn  from 
the  imagination  of  the  writer  of  the  prospectus.  The 
average  guaranteeing  company  cares  nothing  about  the 
merits  of  the  proposition.  Its  guaranty  is  based  on 
the  much  more  solid  security  of  cash  in  hand. 

It  is  to  be  noted  that  in  this  case  the  guaranty  is 
accomplished  by  means  of  a  bond  delivered  to  the 
stockholder  with  his  share  of  stock  at  the  time  of 
purchase.  The  bond  is  employed,  as  explained  later, 
to  avoid  anv  possible  conflict  with  the  corporation 
laws  against  impairment  of  capital  stock  by  payments 
to  stockholders.  The  effect  is  exactly  the  same  as  a 
direct  guarantee  of  the  stock. 


420  FINANCING    AN    ENTERPRISE. 

As  the  matter  appears  to  the  purchaser  of  guar- 
anteed stock,  he  may  at  the  specified  date,  if  not  satis- 
fied with  his  investment,  surrender  his  stock  and  get 
the  full  amount  of  his  money  back.  The  small  in- 
vestor has  but  few  "doings"  with  interest  and  there- 
fore considers  that  when  he  purchases  stock  of  this 
character  he  is  at  least  fully  protected  against  loss. 
He  may  not  realize  profits,  but  he  cannot  lose  any- 
thing. In  other  words,  he  has  all  the  speculative 
possibilities  of  profits  without  the  speculative  risk. 
This  seems  attractive,  and  large  amounts  of  money 
have  been  invested  in  guaranteed  stocks  entirely  on 
the  strength  of  their  superiority  to  the  ordinary  un- 
protected securities. 

As  a  matter  of  fact,  however,  the  guaranteed  stocks 
and  bonds  of  promotion  do  not  protect.  It  is  obvious 
that  the  guaranteeing  company,  not  being  a  philan- 
thropic institution,  must  receive  a  full  quid  pro  quo 
for  every  penny  it  pays  out  on  its  guaranty,  as  well 
as  payment  for  its  trouble  in  addition.  This  quid 
pro  quo  is  an  amount  of  money  sufficient  to  produce 
the  amount  of  the  guaranty  within  the  specified  time, 
and  this  money  comes  directly  from  the  stockholder's 
pocket.  It  is  merely  a  part  of  the  money  that  he  has 
supposedly  paid  for  his  stock,  laid  aside  at  compound 
interest  to  be  returned  to  him — less  the  fees  of  the 
guaranteeing  company — at  the  specified  time  if  he  then 
deems  the  money  better  than  his  stock. 

Or  the  matter  may  be  expressed  in  another  way. 
The  purchase  of  his  stock  is  not  final.  Part  only  of 
the  price  is  actually  paid  over  to  the  company  which 
issues  the  stock,  the  balance  being  escrowed  or  held 


GUARANTEED  STOCK,  BONDS  AND  DIVIDENDS.      421 

in  trust  by  the  guaranteeing  company  till  the  stock- 
holder determines  whether  or  no  he  wishes  to  take  full 
title  to  his  stock.  At  the  end  of  the  specified  period 
the  purchaser  may  either  surrender  his  stock,  take  his 
escrowed  money,  with  interest,  and  depart  in  peace, 
losing  the  amount  of  his  first  payment,  or  may  retain 
his  stock  and  let  the  reserved  payment  be  turned  into 
his  company. 

As  will  be  seen,  there  is  no  protection  here.  A  por- 
tion of  the  purchaser's  money  is  reserved,  it  is  true, 
and  should  the  company  prove  a  failure,  this  much  is 
"a  brand  saved  from  the  burning,"  but  it  would  seem 
to  be  a  misnomer  to  say  that  a  person  is  protected 
in  an  investment  because  a  portion  of  his  money  is 
not  invested.  In  fact,  it  would  seem  to  be  a  fraud 
upon  the  investor  for  the  whole  amount  of  his  money 
should  have  gone  into  the  enterprise.  At  the  end  of 
the  specified  period,  if  the  purchaser  retains  his  stock, 
the  company  does,  it  is  true,  get  this  reserved  pay- 
ment with  accrued  interest — provided  the  guarantee- 
ing company  has  not  failed  or  disappeared  meanwhile 
— but  at  that  time  it  does  not  need  the  money.  In 
its  hour  of  trial — its  period  of  development,  when 
every  available  dollar  is  needed  for  the  salvation  of 
the  enterprise — half  or  more  of  the  price  for  which 
its  stock  was  sold  is  reserved  for  a  bogus  safeguard 
of  the  stockholder's  interest. 

There  is  something  humorous  in  the  idea  of  pro- 
tecting a  man's  investment  by  reserving  a  portion  of 
it  and  putting  it  out  at  compound  interest  for  him. 
It  is  a  fact  that  it  keeps  a  proportion  of  his  money  out 
of  an   investment  which   is  too  often   shaky,   and   is 


422  FINANCING   AN    ENTERPRISE. 

therefore  so  far  a  real  protection.  If,  however,  he  is 
to  be  protected  by  a  reservation  of  his  money  from 
the  investment,  he  would  apparently  be  much  better 
protected  if  he  refrained  in  the  first  place  from  invest- 
ing at  all.  In  other  words,  if  the  enterprise  is  a  good 
one,  it  is  only  fair  to  the  investor  that  all  his  money 
should  be  devoted  to  its  development.  If  it  is  a  bad 
one,  he  had  better  keep  out  of  it  entirely.  The  half- 
way plan  of  guaranteed  stock  is  not  to  his  interest  in 
either  case. 

Up  to  this  point  no  vital  objections  have  been  urged 
against  the  system  of  guaranteed  stock  and  bonds  as 
used  in  promotion.  It  does  not  protect  the  investor, 
it  is  true,  but  in  the  absence  of  misrepresentation  the 
system  is  hardly  to  be  condemned  on  this  account. 
Also  it  deprives  the  enterprise  of  part  of  its  develop- 
ment funds,  but  this  is  a  matter  between  the  promoter, 
the  enterprise  and  the  investor,  and  to  be  settled  by 
them.  In  short,  the  matter  so  far  is  one  of  those  in 
which,  as  diagnosed  by  Lincoln,  "If  a  man  likes  that 
kind  of  thing,  that  is  the  kind  of  thing  he  does  like," 
and  but  little  can  be  said  against  the  general  scheme 
if  honestly  employed. 

When,  however,  we  come  to  consider  the  character 
of  the  guaranteeing  companies  with  which  these  re- 
served funds  are  usually  deposited,  we  do  find  serious 
and  material  objections.  If  a  portion  of  the  investor's 
money  can  be  safely  deposited  at  compound  interest 
for  a  term  of  years  for  his  general  benefit,  the  scheme, 
though  a  very  circuitous  method  of  saving,  may  have 
its  advantages.  If,  however,  the  guaranteeing  com- 
pany  is   itself  unsound  or  even   lacking   in   stability, 


GUARANTEED  STOCK,  BONDS  AND  DIVIDENDS.      423 

the  whole  system  becomes  vicious  and  wholly  to  be 
condemned.  In  perhaps  most  cases  the  character  of 
the  guaranteeing  companies  leaves  much  to  be  desired. 

There  is  no  reason  that  established  and  well-known 
trust  companies  should  not  handle  this  business  if  it 
is  straight  and  properly  managed  in  all  its  details.  As 
a  matter  of  fact — possibly  because  these  requisites  do 
not  always  exist,  and  because  of  the  general  "wild 
cat"  atmosphere  of  the  schemes  in  which  the  system 
is  so  often  employed — the  well-known  trust  companies 
will  but  seldom  handle  matters  of  the  kind,  and  this 
has  led  to  the  organization  of  companies  for  the  special 
purpose  of  holding  the  reserved  funds  that  are  the 
basis  of  the  guarantee.  Nothing  could  be  said  against 
these  companies  if  they  were  organized  in  good  faith 
and  on  a  sufficiently  substantial  basis,  but  in  the  ma- 
jority of  cases  it  is  much  to  be  feared  that  they  are 
not  so  organized,  nor  are  they  such  as  a  prudent  man 
would  select  for  the  deposit  of  his  own  money.  Add 
to  this  the  fact  that  the  terms  for  which  these  funds 
are  held  are  usually  long  ones,  ranging  anywhere  from 
ten  to  fifty  years,  and  the  danger  to  the  guarantee 
funds  is  apparent. 

The  cost  of  guaranteeing  stocks  and  bonds  by  the 
method  discussed  varies  with  the  period,  with  the 
character  of  the  company  making  the  guaranty,  and 
with  the  nature  of  this  guaranty.  It  rises  rapidly  as 
the  time  limit  for  payment  shortens;  also,  if  interest 
or  dividends  are  included,  as  the  amount  of  these  in- 
creases. It  also  rises  with  the  reliability  of  the  guar- 
anteeing concern  or  with  the  solidity  of  the  guaranty. 

A  few  figures  from  the  circulars  of  a  company  en- 


424  FINANCING    AN    ENTERPRISE. 

gaged  in  the  business  of  guaranteeing  stocks  and  bonds 
may  be  of  interest.  It  is  to  be  noted  that  here,  and 
in  most  guarantees  of  the  kind,  the  question  that  might 
otherwise  arise  as  to  the  legahty  of  redeeming  stock 
or  paying  dividends  out  of  the  company's  capital  is 
avoided  by  a  modification  of  the  ordinary  straight 
guaranty.  The  guaranteeing  company,  when  stock  is 
to  be  guaranteed,  instead  of  undertaking  the  repay- 
ment of  the  particular  share  of  stock,  issues  a  bond 
payable  to  the  owner  of  that  stock  at  the  specified 
date  on  the  surrender  of  his  duly  assigned  stock  cer- 
tificate. The  end  to  be  attained  is  exactly  the  same 
though  the  method  is  different.  To  avoid  confusion 
the  bond  mechanism,  not  being  an  essential  feature, 
is  ignored  in  the  discussion  which  follows,  reference 
being  made  only  to  the  redemption  or  guaranteeing 
of  stock. 

The  prices  fixed  by  this  company  range  as  follows, 
a  share  of  stock  of  the  par  value  of  $100  being  re- 
ferred to  in  each  case : 

A  guarantee  to  pay  the  full  face  value  of  stock  at 
the  expiration  of  ten  years  without  dividends,  $60; 
at  the  end  of  fifteen  years,  $47 ;  at  the  end  of  twenty- 
five  years,  $31 ;  at  the  end  of  fifty  years,  $16. 

If  dividends  are  also  to  be  paid,  the  prices  range 
much  higher.  A  guaranty  to  redeem  stock  at  its  full 
face  value  in  ten  years  from  date  of  issue,  with  two 
per  cent,  dividend  paid  annually,  will  cost  ^yy ;  at  the 
end  of  fifteen  years,  $68 ;  at  the  end  of  twenty-five 
years,  $57 ;  at  the  end  of  fifty  years,  $42. 

If  a  four  per  cent,  dividend  is  desired  the  payments 
are  as  follows :    Full  face  value  of  stock  payable  at 


GUARANTEED  STOCK,  BONDS  AND  DIVIDENDS.      425 

the  end  of  ten  years,  with  four  per  cent,  dividends 
payable  annually,  $95 ;  at  the  end  of  fifteen  years, 
$93 ;  at  the  end  of  twenty-five  years,  $90 ;  at  the  end 
of  fifty  years,  $80. 

It  is  also  to  be  noted — and  the  fact  is  very  signifi- 
cant— that  these  guarantees  may  themselves  be  guar- 
anteed if  desired.  That  is,  the  guaranteeing  company 
will  deposit  the  bonds  of  some  known  company  of 
reputation  and  standing — or  even  Government  bonds, 
though  these  come  high — with  a  trust  company  also 
of  known  reputation  and  standing  to  secure  the  pay- 
ment of  its  guarantees,  but  if  this  is  done,  the  prices 
are  much  higher,  increasing  from  twenty  to  forty 
per  cent.,  according  to  the  character  of  the  bonds 
deposited.  In  other  words,  if  the  guarantee  is  to  be 
absolutely  safe  a  materially  higher  price  must  be  paid. 
The  inference  is  direct  and  obvious  that  the  ordinary 
guarantee  is  not  absolutely  safe  and  is  therefore  high 
at  any  price. 

Guarantees  of  a  nature  somewhat  similar  to  those 
under  discussion  are  occasionally,  secured  by  means  of 
paid-up  life  insurance  policies  maturing  at  some  fixed 
date,  as  twenty  or  thirty  years,  the  guaranteed  securi- 
ties being  redeemed  from  the  proceeds.  If  the  insur- 
ance policies  are  taken  nut  in  a  reliable  company — 
as  is  usually  the  case — this  plan  has  at  least  the  merit 
of  safety  for  the  reserved  payments  and  is  an  adequate 
assurance  that  the  guaranty  will  be  paid  when  due. 

It  is  also  to  be  noted  that  what  may  be  termed 
temporary  or  limited  guarantees  are  frequently  se- 
cured by  the  process  of  reserving  the  entire  amount 
necessary  to  meet  these  guarantees.     This  procedure 


426  FINANCING   AN    ENTERPRISE. 

may  be  entirely  legitimate  or  otherwise  according  to 
the  nature  of  the  guaranty. 

For  instance,  an  issue  of  bonds  is  to  be  sold.  The 
company  issuing  these  bonds  is  perhaps  a  new  one  and 
the  payment  of  interest  for  the  first  few  years  may 
be  a  strain  on  its  resources — perhaps  a  dangerous 
one.  This  possible  danger  is  sometimes  avoided  by 
merely  deferring  the  first  interest  payments  on  the 
bonds — as  for  one  or  two  years — by  agreement  with 
the  purchasers,  so  as  to  throw  the  whole  matter  over 
to  a  period  when  the  company  will  presumably  be 
able  to  meet  the  obligation.  This,  however,  might 
have  an  unfavorable  effect  on  the  sale  of  the  bonds 
and  some  provision  for  the  actual  payment  of  the 
interest  when  due  is  frequently  preferable. 

This  is  easily  arranged.  As  the  bonds  are  sold, 
a  portion  of  the  proceeds  sufficient  to  meet  the  interest 
for  the  desired  period  is  reserved  and  the  interest  on 
the  bonds  is  paid  out  of  this  reserve  fund  until  the 
termination  of  the  period.  The  fund  is  deposited  with 
some  reputable  trust  company — usually  the  company 
which  acts  as  trustee  for  the  bonds.  This  company 
receives  a  fixed  fee  for  its  services,  and  the  whole 
proceeding  is  entirely  legitimate.  The  same  end  would 
be  accomplished  by  merely  selling  the  bonds  at  a  lower 
figure  with  interest  not  beginning  for  one  or  two  years, 
as  the  case  might  be,  but,  as  suggested,  the  eflfect 
would  in  some  cases  be  unfavorable,  and  the  reser- 
vation of  proceeds  is  usually  to  be  preferred.  The 
company  is  deprived  of  the  benefit  of  the  funds  so 
reserved,  but  the  amount  is  usually  not  large — the 
provision  rarely  extending  over  two  to  three  years — 


GUARANTEED  STOCK,  BONDS  AND  DIVIDENDS.      42/ 

and  the  advantages  derived  justify  the  expedient.  But 
little  if  any  publicity  is  given  to  this  arrangement  if 
adopted.  It  is  not  intended  for  the  protection  of  the 
investor,  but  for  the  protection  of  the  company  itself. 

A  variation  of  this  plan,  and  a  somewhat  vicious 
variation,  is  found  in  the  practice  of  guaranteeing 
dividends  on  stock  in  the  same  way.  For  instance, 
some  years  since  a  firm  of  brokers  dealing  in  stock 
of  the  Marconi  Wireless  Telegraph  Company  adver- 
tised that  on  stock  of  that  company  sold  by  them 
dividends  would  be  paid  for  a  period  of  five  years  at 
the  rate  of  five  per  cent,  per  annum,  and  that  this 
undertaking  was  guaranteed  by  the  bond  of  a  highly 
reputable  New  York  trust  company.  As  the  Marconi 
Wireless  Telegraph  Company  was  thought  by  those 
familiar  with  the  conditions  to  be  far  from  the  divi- 
dend-paying stage,  the  matter  provoked  considerable 
interest. 

Investigation  showed  that  the  guaranty  was  secured 
by  depositing  with  the  trust  company  the  full  amount 
of  money  necessary  to  pay  these  five  annual  five  per 
cent,  dividends.  The  stock  was  offered  at  par — and, 
incidentally,  it  may  be  said  that  a  very  considerable 
quantity  was  sold  at  this  price.  For  each  share  sold. 
$25,  less  such  amount  as  would  be  provided  for  by 
the  accumulation  of  interest,  was  deposited  with  the 
trust  company  and  the  payment  of  the  stipulated  divi- 
dend was  thereby  unquestionably  secured. 

The  purchasers  of  this  "doctored"  stock  were  not, 
of  course,  familiar  with  the  actual  conditions.  They 
took  it  for  granted  that  the  five  per  cent,  guaranteed 
dividend  was  legitimate  and  was  therefore  either  an 


428  FINANCING    AN    ENTERPRISE. 

indication  of  the  advanced  and  prosperous  condition 
of  the  company  and  the  desirability  of  its  stock,  or 
else  that  the  offered  stock  was  somehow  in  an  inner 
and  preferred  circle  that  gave  it  a  special  standing  and 
value.  The  high  reputation  of  the  trust  company 
involved  helped  out  this  illusion  and  the  guaranteed 
stock  was  sold  on  the  strength  of  these  guaranteed 
dividends  for  more  than  twice  its  quoted  market  value. 
Its  purchasers  paid  over  $50  per  share  more  for  their 
stock  than  it  could  be  purchased  for  elsewhere,  and 
the  only  advantage  they  derived  from  this  extra  cost 
was  the  return  of  $25  per  share  in  five  equal  yearly 
instalments.  The  whole  transaction  came  dangerously 
near  to  a  fraud. 

It  may  be  said  that  the  trust  company  involved  in 
this  matter  protested  vigorously  against  the  manner 
in  which  its  name  was  being  exploited,  stating  that 
the  company  did  not  in  any  sense  guarantee  dividends 
on  the  stock  in  question,  and  that  its  only  connection 
with  the  matter  was  an  Undertaking  to  hold  certain 
funds  and  to  pay  therefrom  to  those  purchasing  the 
stock  in  question  five  per  cent,  a  year  on  the  face 
value  of  that  stock  for  a  period  of  five  years.  The 
experience  of  this  trust  company  will  explain  the  reluc- 
tance of  responsible  institutions  to  appear  in  any  pro- 
motion guarantees  of  stocks  or  bonds. 

It  is  to  be  noted  that  any  guaranty  of  this  kind, 
if  made  by  the  company  issuing  the  stock,  would  be 
illegal,  as  it  amounts  to  a  payment  of  dividends  out  of 
the  company's  capital — a  proceeding  prohibited  in  al- 
most every  state  of  the  Union.  In  the  instance  quoted, 
however,  the  guarantv  being  made  by  a  firm  of  brokers 


GUARANTEED  STOCK,  BONDS  AND  DIVIDENDS.      429 

who  had  previously  purchased  the  stock  from  the 
company  or  from  other  holders,  this  legal  point  did 
not  come  up.  The  stock  had  passed  out  of  the  com- 
pany's hands,  belonged  to  the  brokers,  and  they  were 
at  liberty  to  sell  it  and  to  do  anything  they  pleased 
with  the  proceeds. 

In  conclusion  it  may  be  said  that  the  whole  matter 
of  guaranteeing  stocks  and  bonds  as  practiced  in  pro- 
motion is  a  device  of  somewhat  doubtful  propriety, 
intended  only  to  attract  investors  and  without  an  iota 
of  advantage  beyond  this.  There  is  no  dishonesty 
involved,  though  the  ethics  of  the  usual  and  perhaps 
necessary  concealment  of  the  method  of  the  investor's 
alleged  protection  might  be  questioned.  Nor  if  the 
guaranteeing  company  is  sound  and  the  guaranty  is 
fairly  carried  out  is  there  much  to  be  said  against  the 
system  as  a  whole,  provided  no  misrepresentations 
are  made  to  the  investor.  At  times  it  undoubtedly  is 
attractive,  and  as  long  as  this  is  the  case  it  will  pro- 
bably continue  to  be  employed.  It  is  to  be  noted, 
however,  that  the  system  is  not  now  in  such  common 
use  as  it  was  ten  years  ago. 

A  somewhat  striking  instance  of  the  use  of  guar- 
anteed stock  for  directly  fraudulent  purposes  is  given 
in  Chapter  XXXVIIT,  "Promoters  and  Financiers." 


CHAPTER  XXXVII. 
UNDER^A^RITING. 


Underwriting  as  used  in  financing  is  a  method  of 
insuring  the  sale  of  corporate  securities  in  advance 
of  any  pubhc  offering. 

When  a  substantial  company  has  been  organized 
and  its  stock  or  bonds  are  to  be  sold,  or  when  a  com- 
pany already  organized  issues  additional  stock,  whether 
preferred  or  common,  or  perhaps  an  offering  of  bonds, 
it  is  not  always  certain  that  the  securities  can  be  sold 
at  the  time  to  advantage.  If  offered,  the  sale  may 
fail  in  whole  or  in  part  and  the  needed  funds  not  be 
secured;  or  the  securities  may  sell,  but  not  readily, 
and  the  prestige  of  the  company  be  injured  thereby; 
or  even  though  the  securities  sell  as  rapidly  as  could 
be  expected,  it  may  require  some  time  for  the  sale  of 
the  entire  offering,  while  funds  are  needed  at  once; 
or  the  issue  may  be  too  large  to  be  offered  safely  at 
public  sale;  or  it  may  be  desirable  to  keep  the  securities 
off  the  market  at  that  particular  juncture. 

In  any  of  these  cases  the  possible  or  anticipated 
dangers  are  avoided  by  means  of  underwriting — that 
is,  for  an  agreed  compensation  the  sale  of  the  securi- 
ties is  guaranteed  by  responsible  parties,  as  some  bank 
or  trust  company,  or  perhaps  a  syndicate  composed 
of  individuals  and  institutions  financially  able. 

430 


UNDERWRITING.  43 1 

If  the  securities  are  to  be  offered  to  the  public  with- 
in a  short  time,  the  underwriters  enter  into  an  agree- 
ment that  if  such  securities  are  not  sold  at  the  public 
offering,  they  will  themselves  purchase  them ;  or  if 
the  public  take  but  a  portion  of  the  offering,  they  will 
purchase  the  unsold  balance. 

Or  if  it  is  desired  to  keep  the  securities  off  the 
market  in  whole  or  in  part  at  that  time,  the  under- 
writers may  go  still  further  and  simply  agree  to  fur- 
nish the  desired  money,  and  when  they  have  done  this 
will  take  over  the  securities  and  hold  them  until  such 
time  as  they  can  be  profitably  unloaded. 

The  advantages  of  underwriting  are  manifest.  The 
company  that  issues  the  underwritten  securities  is  ab- 
solutely assured,  no  matter  what  the  conditions  of  the 
money  market,  and  no  matter  what  reception  is  ac- 
corded its  securities,  that  its  money  will  be  available 
at  the  agreed  date  or  dates.  Also  the  danger  of  dis- 
credit, or  of  financial  embarrassment  from  a  failure 
to  sell  the  securities  at  public  offering,  is  entirely  re- 
moved. If  the  securities  are  offered,  but  are  not 
purchased  by  the  public,  they  are  quietly  taken  up  by 
the  underwriters,  and  the  company  issuing  the  securi- 
ties pursues  the  even  tenor  of  its  financed  way  un- 
disturbed. The  cost  of  the  underwriting  is  usually 
well  justified  by  the  benefits  received. 

The  arrangement  is  a  very  common  and  very  con- 
venient one.  It  is  obvious,  however,  that  both  the 
enterprise  and  the  underwriters  must  be  of  consider- 
able financial  ability  and  reputation.  If  the  enterprise 
were  of  uncertain  value  or  doubtful  soundness,  no 
responsible  underwriters  could  be  found  to  insure  the 


432  FINANCING   AN    ENTERPRISE. 

sale  of  its  securities,  and  on  the  other  hand,  if  the 
underwriters  were  not  financially  able,  their  under- 
writing would  be  of  no  effect.  The  procedure  is, 
therefore,  confined  exclusively  to  the  realm  of  sounder 
finance  and  is  not  for  the  ordinary  enterprise.  Occa- 
sionally, it  is  true,  underwriting  is  employed  in  the 
financing  of  enterprises  of  unestablished  or  doubtful 
stability,  but  in  these  cases  it  is  usually  fictitious  and' 
indulged  in  merely  for  effect. 

There  are  two  distinct  plans  pursued  in  ordinary 
underwriting,  which,  though  they  are  the  same  in 
principle,  vary  in  detail.  Under  the  first  plan  the 
securities  are  offered  to  the  public  by  the  company 
which  issues  them  or  by  the  fiscal  agents  of  this  com- 
pany. The  underwriters  then  merely  stand  behind 
the  offering,  guaranteeing  that  the  stock  or  other 
securities  will  be  sold  when  they  are  so  offered.  Some- 
times funds  will  be  advanced  by  the  underwriters  on 
agreed  terms  pending  this  public  offering  of  the  secu- 
rities. 

Under  the  second  plan  the  underwriters  undertake 
to  furnish  the  desired  money  to  the  company  issuing 
the  securities  at  such  times  and  in  such  amounts  as 
may  be  agreed.  The  underwriters  then  take  over  and 
hold  the  securities  until  such  time  as  they  can  be  dis- 
posed of  to  advantage.  In  other  words,  the  under- 
writers actually  purchase  the  securities. 

The  method  of  compensating  the  underwriters  varies 
with  the  plan  adopted.  Under  the  first  arrangement 
an  underwriting  price  is  fixed  upon  the  securities — 
that  is,  a  price  at  which  the  underwriters  must  pur- 
chase  if  the   public  do  not.      A  price  at   which   the 


UNDERWRITING.  433 

securities  are  to  be  offered  to  the  public  is  also  made 
part  of  the  underwriting  agreement.  The  under- 
writers' price  is  naturally  lower  than  that  at  which 
the  securities  are  offered  to  the  public.  If  the  public 
buy  the  securities,  the  compensation  of  the  under- 
writers is  usually  all  or  a  part  of  the  difference  be- 
tween the  underwriters'  price  and  the  public  price,  and 
is  paid  in  cash.  The  underwriters  then  receive  a  sub- 
stantial compensation  for  which  they  have  rendered 
no  equivalent  beyond  the  strength  of  their  names. 
They  have  merely  stood  behind  the  offering,  prepared 
to  make  good  if  the  public  did  not. 

If,  however,  the  public  do  not  buy,  the  underwriters 
must  themselves  purchase  the  securities  at  the  lower 
price  agreed  upon.  In  this  case  the  underwriters  re- 
ceive no  direct  compensation,  their  profits  depending 
upon  their  ability  to  sell  the  securities  at  an  advanced 
price  later. 

For  example,  suppose  a  company  is  organized  and 
issues  preferred  stock  to  the  par  value  of  $500,000, 
which  it  desires  to  sell.  Its  shares  are  $100  each  and 
the  stock  bears  a  preferred,  cumulative  dividend  of 
seven  per  cent.  Such  a  stock  in  a  thoroughly  sub- 
stantial company  having  satisfactory  property  values 
behind  its  capitalization,  should  bring  its  par  value. 
The  times,  however,  might  not  be  favorable,  or  the 
company  not  be  in  a  position  to  offer  the  stock  ad- 
vantageously, or  other  conditions  might  exist  which 
would  render  an  underwriting  advisable. 

Such  underwriting  should  be  secured  without  diffi- 
culty. The  agreement  might  provide  that  the  stock 
should  be  offered  to  the  public  on  a  certain  date  at 


434  FINANCING   AN    ENTERPRISE. 

its  par  value,  and  if  the  stock  were  not  purchased  in 
whole  or  in  part  by  the  pubhc,  that  the  underwriters 
would  themselves  buy  the  stock  at  some  lower  price, 
possibly  at  95.  As  a  consideration  for  this  under- 
taking, it  might  be  agreed  that  the  underwriters  should 
receive  the  difference  between  their  price — $95  per 
share — and  the  price  at  which  the  stock  actually  sold, 
which  in  this  case  would  be  $100  per  share. 

The  stock  is  then  offered  to  the  public.  If  it  is  all 
purchased  the  underwriters  are  released  from  their 
obligation  and  receive  their  agreed  compensation, 
which,  at  the  rate  of  $5  per  share,  would  amount 
to  $25,000.  As  will  be  seen,  the  underwriters  do 
nothing  whatsoever  beyond  standing  ready  to  take  the 
stock  if  the  public  does  not.  At  the  same  time  the 
company  has  been  absolutely  guaranteed  of  at  least 
ninety-five  per  cent,  of  the  par  value  of  the  stock,  and 
the  underwriters'  compensation  is  probably  not  exces- 
sive. If,  however,  the  underwriting  were  very  safe 
and  attractive,  this  compensation  might  be  cut  down 
from  five  to  three  or  even  two  per  cent. 

If,  on  the  public  offering,  none  of  the  stock  is  sold, 
or  perhaps  but  a  portion  of  it,  the  underwriters  must 
then  come  forward  and  purchase  all  unsold  stock  at 
their  price  of  ninety-five.  This  ends  the  transaction  as 
far  as  the  company  is  concerned.  It  has  sold  its  stock 
at  a  low  price,  it  is  true,  but  the  sale  has  been  effected 
and  it  has  the  money  needed  for  the  purposes  of  the 
company.  On  the  other  hand,  the  underwriters  have 
made  an  actual  purchase  of  the  stock  and  they  must 
then  rely  on  a  future  sale  at  an  advanced  price  for 
their  profit.     They  have,  it  is  to  be  presumed,  bought 


UNDERWRITING.  435 

a  good  stock  at  a  low  price  and  their  profits  are  post- 
poned, but  are  not  lost. 

Where  underwriting  is  conservative,  the  profits  are 
exceedingly  good  and  the  risk  negligible.  A  banker 
or  broker  familiar  with  the  conditions,  both  of  the 
security  to  be  offered  and  the  market  upon  which  it 
is  to  be  offered,  should  be  able  to  determine  with  much 
accuracy  both  its  real  value  and  its  prospects  of  selling. 
If  it  sells,  his  profits  are  large  and  made  purely  on 
the  strength  of  a  guaranty  which  he  knew  was  safe. 
If  for  any  reason  the  securities  do  not  sell,  he  is  then 
obliged  to  purchase  them,  but  if  the  underwriting  is 
conservative,  at  a  figure  that  still  insures  him  a  sub- 
stantial profit. 

It  is  obvious  that  the  underwriters — if  the  under- 
writing is  to  be  of  any  effect — must  be  men  of  suffi- 
cient financial  responsibility.  It  is  expected  that  the 
securities  will  be  sold  when  offered,  but  the  whole 
object  of  the  underwriting  is  to  assure  their  sale, 
and  if  the  public  will  not  take  the  securities,  the  under- 
writers must  be  able  to  carry  out  their  guarantee  and 
themselves  purchase  the  offered  securities.  An  under- 
writing by  men  of  this  character  is  an  endorsement 
of  the  underwritten  enterprise  of  the  highest  character, 
and  as  such  in  itself  aids  materially  in  effecting  the 
public  sale  of  the  securities. 

The  enterprise,  then,  must  be  sound  and  substan- 
tial if  underwriting  is  to  be  secured,  and  the  under- 
writers must  be  responsible  if  it  is  to  be  effective. 
In  most  cases  these  conditions  obtain.  At  times,  how- 
ever, through  recklessness  or  misjudgment,  one  or  the 
other  of  these  requisites  is  missing  and  heavy  losses 


436  FINANCING    AN    ENTERPRISE. 

are  then  likely  to  ensue.  Instances  of  this  were  not 
uncommon  in  the  somewhat  inflated  financing  culmi- 
nating in  1903,  when  almost  any  enterprise  having  a 
semblance  of  solidity  could  secure  underwriting.  At 
that  time  financiers  even  of  high  standing  seemed  to 
take  it  for  granted  that  any  colorable  issue  of  stock 
or  bonds  could  be  worked  off  on  the  public  without 
regard  to  its  real  value,  and  underwriting  was  taken 
on  without  the  usual  care  and  precaution. 

The  unfortunate  shipbuilding  trust  is  a  case  in  point. 
Coming  at  the  end  of  the  period  of  "high  finance," 
the  public  were  critical  and  not  in  a  mood  to  buy 
securities  of  the  kind  even  though  good.  Securities 
of  the  shipbuilding  trust  could  not  be  called  good. 
The  undertaking  seems  to  have  been  defective  either 
as  to  the  underlying  properties  or  as  to  the  manner  of 
their  combination.  Whatever  the  cause,  the  securities 
did  not  command  the  confidence  of  the  public  and  did 
not  sell,  and  the  underwriters  were  forced  to  purchase 
at  prices  that  were  disastrous — in  the  case  of  the  Trust 
Company  of  the  Republic  resulting  in  failure  and  a 
final  liquidation. 

The  agreement  entered  into  by  the  underwriters  is 
usually  in  the  form  of  a  subscription  to  the  under- 
written stocks  or  bonds,  the  body  of  the  agreement 
stating  in  detail  the  terms  and  conditions  under  which 
the  subscriptions  are  made.  The  amount  of  securities 
underwritten,  the  price  to  the  underwriters — or  syn- 
dicate, when  the  underwriting  is  taken  by  a  syndicate 
— the  date,  price  and  terms  of  the  public  offering, 
the  profits  to  the  underwriters,  and  the  general  terms 
of  the  underwriting  subscriptions,   are  all    important 


UNDERWRITING.  437 

features  of  the  agreement.  It  is  usually  provided  that 
the  agreement  shall  not  be  effective  until  some  fixed 
sum  has  been  underwritten. 

The  underwriters  are  not  usually  jointly  responsible 
for  the  sale  of  the  entire  underwritten  issue.  On 
the  contrary  each  underwriter  subscribes  or  becomes 
responsible  for  some  definite  amount  of  the  securities, 
as  so  many  shares  of  stock  or  such  a  number  of  bonds. 
This  marks  the  limit  of  his  liability,  and  in  event  of 
profits,  determines  the  proportion  of  the  profits  he  is 
to  receive.  Then,  if  the  public  offering  or  other  sale 
is  a  total  failure,  he  will  be  called  upon  to  take  the 
amount  of  stock  or  number  of  bonds  called  for  by 
his  subscription.  If  but  a  portion  of  the  securities 
are  purchased  by  the  public,  he  will  be  called  upon 
to  take  his  proportion  of  the  unsold  securities,  and 
will  receive  his  due  proportion  of  the  profits  on  the 
securities  actually  sold.  In  case  the  public  offering 
is  a  complete  success,  his  profits  will  be  determined 
in  the  same  way. 

It  is  usual  in  underwritings  of  this  kind  to  provide 
that  the  underwriters  may,  if  they  desire,  purchase  the 
underwritten  securities  in  whole  or  in  part  at  the 
underwriters'  price  at  any  time  prior  to  the  public 
offering,  or  perhaps  some  earlier  specified  date.  For 
instance,  if  some  one  of  the  underwriters  has  under- 
written fifty  shares  of  stock  at  ninety-five,  he  may, 
if  he  wishes,  purchase  these  fifty  shares  in  whole  or  in 
part  at  ninety-five  at  any  time  before  the  public  offer- 
ing, or  such  other  date  as  may  have  been  fixed.  If 
he  exercises  his  privilege  his  underwriting  participa- 
tion, both  as  to  liabilities  and  profits,  is  reduced  by 


438  FINANCING   AN    ENTERPRISE. 

the  number  of  shares  purchased.  If  he  purchased 
twenty-five  shares  he  is  still  liable  on  the  underwriting 
for  the  remaining  twenty-five  shares.  If  he  purchased 
the  entire  fifty  shares,  he  is  out  of  the  underwriting 
entirely  and  does  not  participate  further  in  its  profits 
or  its  obligations.  When  an  issue  of  securities  is 
desirable,  or  particularly  when  the  conditions  improve 
between  the  time  of  underwriting  and  the  public  offer- 
ing, this  privilege  of  purchase  is  often  exercised. 

If  certain  amounts  of  money  are  needed  before  the 
corporation  is  ready  to  offer  its  securities  at  public 
sale,  as,  for  instance,  for  purchase  of  machinery,  or 
payment  for  property,  or  general  preliminary  expenses 
or  other  proper  purposes,  the  underwriting  agreement 
frequently  provides  for  advances  by  the  underwriters. 
Any  amounts  so  advanced  are  repaid  from  the  moneys 
received  from  public  subscription,  or  if  the  securities 
are  not  disposed  of  at  the  public  sale,  are  deducted 
from  the  amount  to  be  paid  by  the  underwriters. 

Or  if  the  underwriters  do  not  care  to  advance  this 
money  directly,  such  preliminary  amounts  are  frequent- 
ly obtained  on  the  security  of  the  underwriting  from 
trust  companies  or  other  financial  institutions.  It  is 
obvious  that  if  the  underwriters  are  of  sufifiicient  re- 
sponsibility to  make  their  underwriting  effective,  this, 
in  connection  with  the  stocks  or  bonds  and  undertaking 
of  the  corporation  itself,  will  furnish  ample  security 
for  any  reasonable  loans. 

The  underwritten  securities  are  usually  offered  to 
the  public  through  some  trust  company  or  other  finan- 
cial institution  designated  by  the  underwriting  agree- 
ment, the  institution  acting  as  trustee  in  the  matter. 


UNDERWRITING.  439 

Or  when  the  underwriting  is  taken  by  a  syndicate, 
this  syndicate  may  make  the  ptibhc  offering  directly 
or  through  its  own  channels.  If  offered  through  a 
trust  company  such  company  will  apportion  the  pro- 
ceeds in  accordance  with  the  terms  of  the  agreement, 
paying  over  to  the  company  and  to  the  individual 
underwriters  the  amount  coming  to  each  from  the 
proceeds  of  the  sale.  If  offered  by  a  syndicate  the 
apportionment  among  the  underwriters  will  be  made 
within  the  syndicate,  the  corporation  merely  holding 
the  syndicate  liable  for  the  net  price  to  be  received 
by  it  for  its  securities. 

In  this  latter  case  the  underwriting  agreement  would 
probably  merely  call  for  a  certain  net  price  on  the 
securities,  the  syndicate  being  left  free  to  offer  them 
at  such  advanced  price — sometimes  within  specified 
limits — as  it  may  deem  advisable,  the  syndicate  bear- 
ing all  expenses  of  the  sale  and  retaining  as  its  profits 
all  excess  secured  over  the  net  underwriting  price. 

The  second  plan  of  underwriting,  under  which  the 
underwriters  advance  the  funds  needed  by  the  corpo- 
ration and  take  over  its  securities  is,  as  a  matter  of 
fact,  a  sale  of  the  stock  or  bonds  to  the  underwriters 
at  such  a  price  as  will  allow  them  a  later  substantial 
profit.  This  plan  is  pursued  when  the  times  are  not 
favorable  for  an  immediate  offering,  or  when  the 
offer  of  so  large  a  mass  of  securities  en  bloc  would 
produce  an  unfavorable  effect  on  their  sale.  Usually 
the  underwriters'  price  on  such  securities  is  such  as  to 
make  them  absolutely  assured  of  a  handsome  subse- 
quent profit.  It  is  obvious  that  the  issuing  institution 
can  afford  to  make  very  liberal  concessions  in  order 
to  secure  the  immediate  cash  it  needs. 


440  FINANCING    AN    ENTERPRISE. 

Underwriting  is  quite  commonly  resorted  to  in  the 
organization  of  new  and  substantial  corporations,  or 
when  combinations  are  made,  or  when  generally  the 
conditions  make  it  desirable.  Even  the  strongest  cor- 
porations employ  it.  The  preferred  stock  of  the  United 
States  Steel  Corporation  was  underwritten  at  the  time 
the  company  was  formed,  and  again  its  five  per  cent, 
bonds  were  underwritten  a  few  years  later  at  the  time 
of  their  issue.  Even  so  strong  and  well-established 
a  corporation  as  the  Pennsylvania  Railroad  resorted 
to  underwriting  in  an  issue  of  stock  some  years  ago. 
The  profits  of  the  underwriters  in  that  instance  ran 
into  the  hundreds  of  thousands  of  dollars,  but  the 
company's  course  was  not  criticized  by  the  soundest 
financiers,  even  though  the  stock  when  offered  was 
readily  sold.  The  times  were  unfavorable,  the  success 
of  the  issue  could  not  be  foretold  absolutely  in  advance, 
and  its  failure,  even  in  part,  would  have  been  most 
disastrous,  involving  loss  of  prestige  as  well  as  the 
failure  of  the  needed  funds.  The  price  paid  to  avoid 
these  disquieting  possibilities  was  not  excessive. 


CHAPTER  XXXVIII. 
PROMOTERS"  AND   "FINANCIERS. 


A  successful  promoter  must  possess  sound  judg- 
ment, much  business  experience,  wide  connections, 
and  more  or  less  persuasive  and  magnetic  personality. 
In  addition,  he  must  ordinarily  be  capable,  honest  ac- 
cording to  the  circles  in  which  he  moves,  and  of 
good  reputation.  Such  men  do  exist  in  all  our  large 
cities,  but  the  man  with  an  enterprise  will  have  much 
difficulty  in  finding  them,  and,  when  found,  in  enlist- 
ing their  services. 

Theoretically  a  man  of  this  kind,  devoting  his  at- 
tention to  promoting,  would  take  up  an  attractive  and 
meritorious  enterprise,  organize  it  with  a  reasonable 
capitalization  and  a  well  devised  plan  of  operation, 
reserve  a  substantial  stock  interest  for  himself  and 
those  associated  with  him  in  the  enterprise,  and  sell 
enough  of  the  remaining  stock — as  he  could  easily  do 
— to  provide  ample  capital  for  development  and  oper- 
ation. The  financed  enterprise  would  then  be  placed 
in  the  hands  of  competent  managers  and  while  it  was 
booming  along  the  royal  road  to  success,  the  promoter 
would  take  up  and  finance  the  next  good  enterprise 
in  the  same  way.  By  repeating  this  performance  he 
would  with  ease  and  rapidity  accumulate  wealth  far 
beyond  the  ordinary  dreams  of  avarice,  until  accumu- 

441 


442  FINANCING   AN    ENTERPRISE. 

lation  itself  became  a  weariness  and  he  turned  for 
relaxation  and  amusement  to  moral  discourses  and  the 
founding  of  libraries. 

There  are  men  who,  so  far  as  their  personal  part 
is  concerned,  are  capable  of  carrying  out  this  program 
to  the  letter.  Indeed,  some  of  the  large  exploration 
companies — which  are  really  exploitation  companies 
— are  practically  doing  this  very  thing.  The  reason 
that  it  is  not  more  frequently  done  is  found  mainly, 
if  not  entirely,  in  two  facts — one,  that  the  promoter's 
profits  almost  always  depend  upon  the  final  commer- 
cial success  of  his  enterprise,  and  the  other,  that  it  is 
almost  impossible  for  him  to  find  assistants  who  are 
capable  of  carrying  on  his  enterprise  to  this  required 
success. 

In  some  of  the  combinations  and  trusts  formed 
within  the  past  decade  the  promoter's  profits  have 
been  in  cash  or  "cashable"  securities,  because  the 
undertaking  was  based  on  going  concerns.  When  this 
is  not  the  case  the  promoter  sometimes  stipulates  for 
a  commission  on  the  money  secured,  when  any  profits 
are  again  immediate.  Usually,  however,  the  pro- 
moter's profits  are  "paper"  profits  to  be  converted 
into  something  more  substantial  by  the  development 
and  operation  of  the  enterprise.  In  other  words,  while 
the  promoter's  work  in  financing  enterprises  is  of 
prime  importance  and  an  essential  preliminary  to  suc- 
cess, and  while  his  profits  on  these  enterprises  are 
nominally  enormous,  they  are  also — and  properly — 
mainly  in  the  securities  of  the  companies  he  has  form- 
ed and  are  therefore  dependent  for  their  value  upon  the 
success  of  the  respective  undertakings.    The  promoter 


PROMOTERS      AND      FINANCIERS.  443 

cannot  therefore — or  should  not — profit  largely  until 
the  enterprise  has  attained  industrial  success. 

In  practice,  then,  when  the  really  capable  men  we 
have  been  considering  devote  themselves  to  promoting, 
their  enterprises  are  usually  financed  with  considerable 
ease,  money  being  secured  quite  as  much  on  the  repu- 
tation and  known  ability  of  the  promoters  as  on  the 
actual  merits  of  the  enterprises.  Then,  however,  their 
profits  must  usually  be  worked  out,  and  unless  this 
task  can  be  delegated  to  others,  it  occupies  the  larger 
portion  of  the  promoter's  time  and  attention. 

It  is  almost  impossible  for  the  promoter  to  shift 
the  burden  of  this  development  to  other  shoulders. 
Men  who  can  carry  on  large  enterprises  to  commer- 
cial success,  except  under  the  closest  supervision,  are 
almost  as  scarce  as  successful  promoters.  They  are 
also  difficult  of  discovery  and  much  in  demand.  The 
subsequent  operations  of  the  financed  enterprises  are 
therefore  usually  thrown  directly  and  unavoidably  upon 
the  promoter.  Then,  two  or  three  good  big  enter- 
prises taken  up  and  financed  will  so  occupy  the  pro- 
moter's time  and  attention  that  he  is  completely 
"balled  up"  and  cannot  if  he  would  take  up  further 
promoting  propositions. 

It  is  no  unusual  thing  for  a  successful  promoter  to 
reap  returns  from  the  financing  of  a  large  enterprise 
— in  its  stock  or  other  securities — up  into  the  hun- 
dreds of  thousands  and  even  millions  of  dollars.  With 
such  excessive  profits  waiting  to  be  worked  out  and 
with  his  reputation  also  at  stake,  it  is  no  wonder 
that  the  promoter,  now  a  financier,  is  in  no  mood 
for  new  undertakings. 


444  FINANCING    AN    ENTERPRISE. 

The  same  thing  occurs  on  a  smaller  and  more 
modest  scale  with  men  of  less  ability  in  financing. 
They  work  for  a  time  in  promoting  enterprises  for 
others,  but  if  they  possess  any  real  ability  in  their 
particular  line,  quickly  become  men  of  "afifairs"  and 
those  affairs  their  own,  and  they  are  then  no  longer 
in  the  field  as  promoters. 

It  is  true,  of  course,  in  all  these  cases  that  a  time 
usually  comes  when  the  successful  promoter  will  have 
carried  and  matured  the  undertakings  in  which  he  is 
interested  so  far  that  he  can  leave  them  largely,  if 
not  entirely,  in  the  hands  of  subordinates.  Then,  not 
being  fully  occupied  with  the  matters  in  hand,  he  is 
ready  for  new  enterprises.  If  something  unusually 
attractive  presents  itself  at  this  juncture,  he  will  take 
it  up  and  carry  it  through.  This,  then,  is  the  oppor- 
tunity for  the  man  with  the  enterprise  to  secure  the 
services  of  a  first-class  promoter. 

From  this  brief  consideration  of  the  subject  it  is 
easily  seen  why  promoters  and  promoting  concerns 
of  real  merit  but  seldom  figure  openly  in  that  capacity. 
They  undoubtedly  do  exist  in  reasonable  numbers,  but 
their  work  is  mainly  or  entirely  of  a  private  nature. 
They  take  up  enterprises  and  promote  them,  but  these 
enterprises  become  and  are  known  as  their  own. 

As  a  matter  of  fact  there  is  a  conspicuous  absence 
of  reputable  men  or  concerns  publicly  engaged  in  the 
business  of  "promoting"  or  "financing"  enterprises — 
that  is,  concerns  or  individuals  whose  occupation  is 
taking  up  and  promoting  enterprises  for  the  owners. 
There  are,  it  is  true,  numbers  of  concerns  and  indi- 
viduals advertising  to  finance  enterprises  and  secure 


PROMOTERS      AND      FINANCIERS.  445 

capital.  They  undoubtedly  do  secure  capital,  or  they 
could  not  continue  to  exist,  but  from  the  writer's 
observation  and  the  extended  experience  of  others, 
it  would  seem  that  the  capital  they  secure  is  almost 
entirely  from  and  not  for  their  clients. 

It  is  obvious  that  something  must  be  wrong  with 
either  man  or  concern  posing  as  a  public  promoter 
and  ready  at  any  and  all  times  to  take  any  and  all 
enterprises  and  carry  them  through  to  financial  suc- 
cess. Concerns  and  individuals  willing  and  anxious 
to  undertake  all  this  do  exist  and  are  not  hard  to  find, 
but,  speaking  generally,  they  do  not  "make  good." 
The  very  fact  that  they  advertise  their  ability  and 
willingness  to  secure  capital  for  enterprises  is  enough 
to  stamp  their  claims  as  false.  A  few  successful 
"financings"  would  alone  be  sufficient,  without  any 
other  advertising,  to  bring  them  all  the  enterprises  to 
be  financed  that  they  could  possibly  desire.  The  chief 
difficulty  of  concerns  that  really  finance  enterprises  is 
to  escape  the  importunities  of  those  who  wish  to  bring 
them  business  of  the  kind.  They  do  not  dream  of 
advertising  for  enterprises  to  finance. 

The  advertisements  of  the  concerns  and  individuals 
of  the  public-promoter  type  usually  read  much  alike : 
"Capital  secured  for  meritorious  enterprises."  "Com- 
panies incorporated,  stocks  and  bonds  sold  and  enter- 
prises financed."  "Inventors  or  others  desiring  ad- 
ditional capital  should  see  us."  "We  represent  several 
private  bankers,  trust  companies  and  individual  capi- 
talists," etc.,  etc. 

If  application  is  made  to  these  advertisers,  the  gen- 
eral result  is  about  the  same.     The  concern  appealed 


446  FINANCING   AN    ENTERPRISE. 

to  is  more  or  less  enthusiastic  about  the  particular 
enterprise,  is  quite  sure  that  the  required  money  can 
be  secured;  has  perhaps  been  looking  for  something 
of  just  that  kind ;  will  possibly  have  somebody  in  mind 
who  wishes  to  invest  in  an  enterprise  of  the  kind,  and 
about  this  juncture,  when  the  applicant  is  feeling 
cheerfully  confident  that  his  troubles  are  over,  and  is 
congratulating  himself  upon  the  very  capable  hands 
into  which  he  has  fallen,  a  demand  for  an  advance 
payment  of  money  will  be  made. 

The  basis  of  this  demand  will  vary  with  the  condi- 
tions. Incorporation  or  re-incorporation  of  the  enter- 
prise furnishes  a  favorite  pretext.  It  is  obvious  that 
stock  or  other  corporate  securities  cannot  be  sold  if 
they  do  not  exist,  and  if  the  enterprise  is  not  incor- 
porated, the  demand  is  not  in  itself  unreasonable.  The 
main  objection  then  lies  in  the  fact  that  the  promoting 
concern,  while  highly  gifted  in  the  matter  of  charging 
for  its  services,  is  not  qualified  to  do  the  work.  The 
incorporations  effected  by  such  concerns  are  almost 
always  defective;  in  many  cases  are  absolutely  worth- 
less and  in  some  cases  are  even  worse,  so  tangling 
up  the  affairs  of  the  undertakings  as  to  involve  much 
expense  and  trouble  in  merely  undoing  the  work  al- 
ready done.  An  excessive  fee  is  charged  for  these 
worthless  incorporations  and  their  stock  is  not,  as  a 
rule,  sold.  The  client  therefore  finds  that  he  has 
expended  more  money  than  necessary,  has  secured 
an  incorporation  of  doubtful  status  or  no  status  at 
all,  and  that  his  securities  are  still  unsold  and  usually 
not  in  shape  to  be  salable. 

If  the  enterprise  is  already  incorporated,   a   re-in- 


''promoters"  and  "financiers."  447 

corporation  on  different  lines,  but  still  involving  liberal 
fees,  will  be  suggested  by  these  "financing"  concerns; 
or  perhaps  their  financial  experts  will  decide  that  an 
issue  of  preferred  stock  or  of  bonds  is  desirable,  and 
will  demand  money  for  the  legal  work  involved  and 
for  the  preparation  of  the  stock  certificates  or  bonds. 
Or  if  these  demands  are  not  sufficiently  plausible  to 
carry,  they  will  perhaps  suggest  a  guaranty  of  the 
stock  or  bonds  they  are  supposed  to  sell,  or  will  ask 
for  money  to  advertise  the  securities  for  sale,  or  they 
may  find  it  necessary  to  have  a  prospectus  printed,  or 
they  may  decide  that  additional  or  foreign  patents  are 
necessary.  Sometimes  without  evasion  of  any  kind 
they  will  demand  money  as  a  direct  retainer. 

The  following  letter  from  a  concern  of  this  kind 
is  copied  verbatim  from  one  received  by  a  friend  of 
the  author,  the  names  only  being  changed.  It  was 
received  in  response  to  an  inquiry  as  to  whether  the 
concern  could  assist  in  financing  an  invention  owned 
by  the  gentleman  writing.  It  may  be  said  in  passing 
that  this  invention  was  in  such  an  undeveloped  state 
and  so  far  from  any  condition  in  which  it  could  be 
financed  by  the  sale  of  stock  or  bonds,  that  the  matter 
would  not  have  been  contemplated  seriously  by  any 
responsible  house.  The  letter  is  so  characteristic  that 
no  apology  is  needed  for  its  insertion. 

Mr.  John  Corliss, 

Camden,  New  Jersey. 
Dear  Sir: 

Your  letter  of  the  22d  inst.  duly  to  hand  and  con- 
tents fully  noted.    We  are  not  in  a  position  to  do  any- 


44^  FINANCING   AN   ENTERPRISE. 

thing  to  assist  you  in  promoting  this  enterprise  until 
your  Company  is  incorporated,  as  we  handle  nothing 
but  stock,  and  this  before  we  could  put  it  on  the 
market  would  be  required  to  be  guaranteed  by  the 
Banking  Company  who  do  our  business. 

If  you  should  desire  it,  we  can  incorporate  a  Com- 
pany for  you  under  some  of  the  western  states  at  a 
nominal  cost,  which  would  answer  all  your  require- 
ments so  far  as  the  Charter  is  concerned,  and  if  you 
could  give  us  full  particulars  as  to  the  amount  of 
capital  you  are  thinking  of  incorporating  for,  we  could 
give  you  the  cost  of  the  Charter  and  possibly  stand 
in  with  you  on  the  expense  of  getting  same. 

Should  be  glad  to  hear  from  you  at  your  con- 
venience. Yours  truly, 

Wellman-Phillips  Co. 

It  will  be  noticed  that  this  letter  covers  several 
points  of  possible  profit  to  the  promoting  concern. 
In  the  first  place  the  enterprise  must  be  incorporated, 
and  it  is  a  fair  presumption  that  substantial  fees 
would  have  been  demanded  for  this  service  if  the 
applicant  had  pursued  the  matter  further.  In  order, 
however,  to  make  it  easier  and  more  attractive  for  the 
possible  client,  the  promoting  concern  intimates  that 
it  can  possibly  share  the  expense.  Such  offers  are 
very  common  in  the  realm  of  "fake"  promotion.  It 
merely  means  that  the  promoting  concern,  instead  of 
taking  its  full  fees  in  cash,  would  be  willing  to  take 
part  in  cash  and  the  balance  in  stock  of  the  enterprise. 
As  the  portion  of  the  fees  paid  in  cash  is  usually 
sufficient  not  only  to  cover  the  expense  of  the  work 


PROMOTERS      AND  "FINANCIERS."  449 

but  leave  the  promoting  concern  a  profit,  the  offer  is 
a  very  safe  one  and  particularly  so  as  it  is  to  lead  to 
further  "business." 

After  the  incorporation  of  the  company  its  securi- 
ties must  be  guaranteed,  according  to  our  letter,  and 
here  comes  in  another  source  of  possible  profit  to  the 
promoting  concern.  This  guaranty  must  be  made 
"by  the  Banking  Company  who  do  our  business." 
The  guaranteeing  company  in  such  cases  will  usually 
require  a  substantial  retaining  or  first  fee  in  advance, 
and  it  is  more  than  a  presumption  that  in  most  cases 
of  the  kind  the  promoting  concern  and  the  guarantee- 
ing company  work  together  and  divide  this  first  fee. 
Then,  even  if  the  matter  goes  no  further,  both  these 
parties  have  received  excellent  payment  for  the  work 
they  have  not  done. 

After  the  incorporation  has  been  effected  and  the 
guaranty  of  the  corporate  securities  has  been  obtained, 
the  sale  of  these  securities  is  still  to  be  considered. 
Here  again  the  promoting  concern  has  an  opportunity 
to  bleed  the  applicant — an  opportunity  which  is  never 
neglected.  ]\loney  will  be  required  for  a  prospectus 
or  advertising,  or  expense  money,  or  some  other  of 
the  many  schemes  devised  by  the  fertile  imaginations 
of  the  promoting  concern.  If  the  applicant  accedes 
to  these  demands,  other  demands  are  apt  to  follow, 
until  he  becomes  weary  of  parting  with  his  substance 
and  brings  the  matter  to  a  close.  As  a  net  result  the 
promoting  concern  has  pocketed  a  substantial  amount 
of  the  applicant's  money  and  the  applicant  has  nothing 
to  show  for  it  beyond  some  experience,  which,  it  is 
to  be  hoped,  is  of  value,  and  an  incorporation  which 
is  usually  of  no  value  whatsoever. 


450  FINANCING    AN    ENTERPRISE. 

Most  of  the  demands  made  by  these  concerns  would 
be  entirely  proper  and  not  to  be  objected  to  if  they 
really  led  to  the  sale  of  the  securities  and  the  general 
financing  of  the  enterprise.  As  a  matter  of  fact,  how- 
ever, it  is  but  rarely,  if  ever,  that  any  results  are 
secured,  and  the  demands  for  money  made  by  these 
concerns  are  made  with  the  full  knowledge  that  their 
client  will  advantage  little  or  nothing.  Such  pro- 
cedure may  not  be  a  fraud  from  the  legal  standpoint, 
but  comes  as  close  to  it  as  is  safe  for  the  promoting 
concern.  Occasionally  it  comes  closer.  Several  such 
concerns  in  New  York  City  have  received  advertising 
not  desired  by  their  publicity  departments  through  po- 
lice raids  and  proceedings  in  the  criminal  courts. 

Undoubtedly  the  concerns  in  question  would,  if  they 
could,  sell  their  clients'  securities.  They  usually  do 
something  in  return  for  the  benefits  received.  If  they 
demand  money  for  advertising,  at  least  a  portion  of 
this  money  will  usually  be  expended  in  advertising. 
Also,  if  without  too  much  trouble  and  expense  they 
can  do  anything  to  finance  the  enterprise,  they  are 
generally  willing  to  make  the  attempt.  It  is  even 
possible — though  as  to  this  the  author  has  no  personal 
knowledge — that  enterprises  are  sometimes  financed 
through  these  concerns. 

As  a  rule,  however,  the  only  money  obtained  by 
these  concerns  is  that  taken  from  their  clients,  the 
amount  they  secure  depending  entirely  on  the  willing- 
ness and  ability  of  their  clients  to  "give  up."  In  one 
instance  within  the  writer's  knowledge  over  $i,ooo 
in  cash  was  paid  a  concern  of  this  kind  to  cover  the 
expense  of  a  bond  issue.     This  was  done  on  the  state- 


PROMOTERS      AND      FINANCIERS.  45 1 

ment  that  the  bonds  could  undoubtedly  be  sold  if  they 
were  once  properly  issued.  The  concern  did  not, 
however,  state  that  it  would  sell  the  bonds,  or  obligate 
itself  in  any  way,  and  the  consequence  was  that  the 
concern  got  its  money,  the  client  got  some  valuable  ex- 
perience and  some  cheaply  engraved  bonds,  but  the 
bonds  were  not  and  are  not  sold.  This  same  concern 
openly  announced  in  its  printed  matter  that  "No  ap- 
plication \\-\\\  be  considered  unless  a  check  for  $250 
is  deposited  with  us  at  the  time  of  sending  in  the 
application."  It  is  gratifying  to  state  that  the  career 
of  this  particular  institution  was  brought  to  a  sudden 
and  deserved  conclusion  by  the  efforts  of  the  police, 
assisted  by  a  capacious  patrol  wagon. 

In  most  cases,  however,  transactions  of  the  kind  are 
not  conducted  on  so  lofty  a  basis.  Even  in  the  case 
of  the  concern  mentioned,  there  is  a  suspicion  that 
a  less  amount  than  $250  would  have  enlisted  its  at- 
tention and  sympathies  if  the  prescribed  amount  was 
not  forthcoming.  In  most  cases  no  limit  of  any  kind 
exists,  the  only  practical  limitation  being  the  amount 
obtainable  from  the  client.  Handsome  fees  are  always 
desired  and  requested,  but  if  these  cannot  be  extracted 
from  unwilling  or  "unable"  clients,  the  usual  pro- 
moting concern  is  not  disposed  to  be  critical,  but  will 
take  what  he  has  even  though  it  be  but  a  few  dollars. 

In  this  connection  a  quotation  from  ex-Postmaster 
General  Cortelyou  as  reported  in  the  Ne7V  York  Times 
is  in  point.  This  is  in  explanation  of  the  fraud  prac- 
ticed some  years  since  by  the  Imperial  Trustee  Com- 
pany of  New  Jersey,  acting  in  collusion  with  brokers 
and  promoting  concerns  who  professed  to  secure  capi- 


452  FINANCING   AN    ENTERPRISE. 

tal  for  enterprises.  The  situation  outlined  is  very 
characteristic,  though  it  must  be  said  that  in  the  pres- 
ent instance  the  whole  arrangement  seems  to  have 
been  a  fraud  without  mitigation,  whereas  in  most  of 
the  "capital-securing"  concerns  nothing  openly  fraudu- 
lent obtains — anything  that  would  give  a  basis  for 
either  civil  or  criminal  proceedings  being  carefully 
avoided. 

"The  company  advertised  to  act  as  trustee  under 
corporate  mortgages  and  deeds  of  trust,  and  as  regis- 
trar and  transfer  agent  of  corporations  and  corporate 
securities ;  to  execute  trusts  of  all  kinds,  to  guarantee 
corporate  and  other  securities,  to  incorporate  and  re- 
organize companies  in  any  State,  to  act  as  accountant, 
to  furnish  a  registered  office  for  New  Jersey  corpor- 
ations and  a  safety  deposit  vault  for  clients. 

"It  was  in  the  guaranteeing  of  corporate  and  other 
securities  that  the  schemers  made  their  money.  *  *  * 
Colt,  and  other  brokers,  agents  of  the  Imperial, 
would  advertise  broadcast  that  they  had  money  to 
invest  in  bonds  for  clients.  The  amount  awaiting  in- 
vestment would  be  variously  given — sometimes  run- 
ning into  the  hundreds  of  thousands.  Often  a 
preference  was  stated  in  the  advertisements  for  the 
securities  of  newly  organized  concerns,  those  of  an 
industrial  nature  particularly. 

"When  the  man  with  bonds  to  sell  visited  the  broker 
who  had  money  to  invest  he  would  invariably  be  met 
with  the  statement  that  the  securities  would  have  to 
be  guaranteed,  and  the  suggestion  would  be  made  that 
the  Imperial  Trustee  Company  was  the  institution 
from  which  a  guarantee  would  be  most  certain  to 
insure  results. 


PROMOTERS      AND      FINANCIERS.  453 

"The  Imperial  Trustee  Company  was  ever  ready  to 
underwrite  the  securities  and  would  insist  that  a  cer- 
tain amount  of  the  proceeds  of  their  sale  be  deposited 
with  it  to  provide  for  their  redemption  at  the  expi- 
ration of  the  time  for  which  they  were  to  run.  This 
was  thoroughly  business-like  and  no  objection  could 
be  made.  Impressed  with  the  idea  that  there  were 
customers  waiting  only  for  the  guarantee,  the  custo- 
mers usually  put  up  the  money  demanded  as  a  fee 
and  turned  over  the  bonds  to  the  brokers,  who  under- 
took to  dispose  of  them.  In  some  instances  the  fees 
amounted  to  thousands. 

"This  would  end  the  transactions,  so  far  as  results 
were  concerned.  In  all  my  investigations  I  have  not 
learned  of  a  single  bond  being  disposed  of  through 
a  broker  working  with  the  Trustee  Company.  Finally 
the  victim  would  realize  that  he  had  been  defrauded, 
but  in  the  great  majority  of  cases  he  would  go  no 
further  than  to  demand  the  return  of  the  securities. 
In  the  meantime  the  company's  brokers  would  be  seek- 
ing other  investors." 

The  postal  authorities  undoubtedly  did  have  a  very 
clear  perception  of  the  manner  in  which  this  and 
similar  frauds  are  worked.  The  only  regret  is  that 
the  exposure  was  not  made  sooner.  The  amount  se- 
cured by  the  Imperial  Trustee  Company  from  its 
fraudulent  transactions  was  far  up  in  the  hundreds  of 
thousands  of  dollars. 

Another  expression  of  expert  opinion  relating  par- 
ticularly to  the  sale  and  financing  of  patents  may  be 
of  interest  as  showing  the  operations  of  the  "system" 
in  this  field.    The  quotation  is  from  the  printed  matter 


454  FINANCING    AN    ENTERPRISE. 

of  a  firm  of  patent  attorneys.  Its  statements  arc 
intended  to  warn  the  clients,  or  prospective  clients  of 
the  firm,'  from  the  snares  that  are  more  thickly  spread 
in  the  path  of  the  inventor  than  is  the  case  in  almost 
any  other  line  of  financing. 

"Inventors,  as  soon  as  they  receive  their  patents, 
or  a  very  short  time  after,  will  be  beset,  importuned 
and  harassed  by  offers,  propositions,  requests  and 
solicitations  of  all  kinds  and  descriptions,  coming  from 
firms,  persons  and  companies,  not  only  in  this  country, 
but  also  in  foreign  countries.  *  *  *  These  propo- 
sitions will  be  very  attractive  and  temptingly  prepared, 
and  will  vary  with  the  ingenuity  of  their  authors. 
Some  will  pretend  to  want  to  purchase  inventions 
outright,  others  to  place  them  on  royalty,  and  still 
others  to  sell  on  commission,  enclosing  contracts  drawn 
up  in  an  impressive  way.  All  of  these  propositions, 
although  apparently  different,  will  have  one  point  in 
common;  they  require  the  payment  of  a  cash  fee  in 
advance.  One  will  say  that  it  is  necessary  to  have 
money  to  advertise  the  patent,  another  the  cost  of 
having  circulars  printed,  and  another  the  cost  of  secur- 
ing copies  of  the  patent  for  distribution,  and  so  on. 
There  is  no  end  to  these  pretexts.  We  are  often 
asked  by  inventors  if  these  parties  who  so  plausibly 
claim  to  be  able  to  sell  patents  are  reliable,  and  whether 
they  ever  effect  sales.  We  regret  to  be  obliged  to 
say  that,  in  many  instances,  they  are  unreliable,  and 
we  are  unable  to  learn  of  their  making  any  sales. 
Our  advice  is  to  ignore  these  offers  entirely,  as  agents 
of  this  class  have  no  facilities  for  selling  patents, 
and   aim   only  to  collect  money   for   which   they  can 


PROMOTERS      AND      FINANCIERS.  455 

give  no  return.  A  favorite  scheme  with  these  parties 
is  to  sohcit  foreign  patent  business,  representing  that 
they  have  extraordinary  facihties  for  selhng  the  for- 
eign patent  rights,  and  even  going  so  far  as  to  set  a 
price  which  the  foreign  patent  should  bring  (such 
price  being  fixed  at  an  attractive  figure).  They  state, 
however,  that  they  will  only  dispose  of  the  inventions 
of  persons  applying  for  patents  through  them.  It  is 
best  to  have  nothing  to  do  with  these  persons,  as  this 
is  a  very  old  device  to  secure  foreign  patent  business, 
for  they  have  neither  the  facilities  nor  the  intention 
to  dispose  of  your  patents,  but  simply  make  these  offers 
as  a  bait  to  obtain  your  foreign  patent  business.  We 
would  advise  inventors  to  beware  of  those  attorneys 
who  offer  to  transact  their  foreign  business  at  rates 
very  much  below  those  charged  by  reputable  attorneys. 
These  attorneys  will  subsequently  make  extra  charges 
for  amendments,  etc.,  and  if  you  refuse  to  submit  to 
the  extortion  they  will  decline  to  prosecute  your  cases 
further." 

The  demands  for  money  made  by  these  "capital- 
securing"  concerns  are  sometimes  very  plausible.  In 
a  case  in  mind  an  inventor  was  approached  with  the 
suggestion  that  foreign  patents  on  an  invention  of 
his  would  be  exceedingly  profitable  and  that  the  con- 
cern communicating  with  him  would  be  glad  to  under- 
take their  sale.  Of  course  the  patents  must  be  secured 
before  they  could  be  sold,  but  the  managers  of  the  ac- 
commodating capital-securing  concern  were  so  favor- 
ably impressed  with  the  merits  of  the  invention  and 
the  profits  that  might  be  obtained  therefrom,  that 
they  were  willing  to  help  the  inventor  get  the  foreign 


456  FINANCING   AN    ENTERPRISE. 

patents,  and  for  a  suitable  interest  in  these  patents 
would  put  up  a  full  one-half  of  the  total  cost.  Inves- 
tigation showed  that  the  fees  charged  by  this  house 
were  something  over  twice  what  the  patents  could 
be  secured  for  through  other  channels.  Hence,  the 
promoting  concern  was  entirely  safe  of  at  least  a 
moderate  profit  on  its  proposition.  It  is  not  unrea- 
sonable to  suppose  that  it  would  have  made  further 
demands  and  further  profits  out  of  the  transaction 
had  its  first  offer  been  accepted. 

Instances  of  the  exactions  of  these  concerns  might 
be  multiplied  indefinitely.  It  is,  however,  entirely 
sufficient  to  lay  down  the  general  rule  that  in  New 
York — and  presumably  in  the  other  large  cities  of  the 
country — no  matter  what  the  pretext,  nor  how  alluring 
the  ends  to  be  attained,  any  advance  payment  de- 
manded by  a  promoting  concern  should  be  regarded 
as  a  danger  signal  warning  the  applicant  off.  Repu- 
table houses  do  not  make  demands  of  the  kind,  and 
it  is  but  inviting  loss  and  disappointment  to  devote 
time  to  negotiating  with  a  concern  that  docs. 

It  is  possible,  of  course,  that  there  may  be  institu- 
tions of  the  kind  conducting  legitimate  businesses  and 
even  asking  advance  payments  from  their  clients,  but, 
if  so,  their  number  is  too  few  to  affect  the  general 
rule,  and  their  whereabouts  is  unknown  to  the  writer. 

When  we  come  to  individuals,  as  has  been  said  in  an 
earlier  chapter,  promoters  may  be  found  who  really 
promote,  but  to  discover  them  is  apt  to  be  a  matter  of 
considerable  difficulty.  They  do  not  either  adver- 
tise or  even  call  themselves  promoters.  Their  pro- 
moting is  of  a  semi-private  nature,  and  in  perhaps  the 


1 


PROMOTERS      AND      FINANCIERS.  457 

majority  of  cases,  in  connection  with  their  regular 
business.  They  are  not  professional  promoters  and 
are  not  to  any  extent  in  the  public  eye. 

The  real  professional  promoters  of  the  larger  cities 
are  the  unsuccessful  ones.  Most  of  these  have  drifted 
into  promotion  because  thrown  out  of  their  accustomed 
channels,  or  perhaps  they  have  been  "drifted  out" 
by  unfortunate  enterprises  which  they  undertook  to 
finance  and  which  have  gradually  absorbed  their  time, 
money  and  attention  to  the  loss  of  all  other  business. 

The  majority  of  these  promoters  are  elderly  men; 
in  many  cases  men  who  have  been  in  business  and 
successful  business,  but  have  for  one  reason  or  another 
lost  their  money  and  their  business  standing  and  have 
taken  up  promoting  as  a  forlorn  hope.  Once  in  the 
toils  they  rarely  escape,  but  go  on  year  after  year, 
eking  out  existence  as  best  they  may  and  looking 
forward  to  some  happy  stroke  of  promotion  luck  that 
will  put  them  on  "easy  street." 

It  is  but  rarely  that  these  professional  promoters 
accomplish  any  financing  of  importance,  and  they  live 
by  borrowing,  by  an  occasional  small  commission,  by 
payments  for  introductions,  by  advances  from  credu- 
lous clients  and  by  other  receipts  of  uncertain  nature. 
They  are  usually  seedy,  almost  invariably  in  financial 
straits,  and  always  cheerfully  ready  to  take  on  new 
business. 

Many  of  these  promoters  have  good  connections, 
and  they  will  explain  at  length  just  whom  they  are 
related  to,  what  prominent  business  men  they  are  ac- 
quainted with,  or  have  had  dealings  with,  and  will  give 
details  to  show  their  familiar  relations  with  the  parties 


458  FINANCING    AN    ENTERPRISE. 

mentioned.  In  most  of  these  cases  the  statements 
are  largely,  if  not  wholly  true,  but  unfortunately  the 
promoters  have  no  standing  with  these  friends  or  con- 
nections that  affords  a  basis  for  the  transaction  of 
business.  Usually  an  introduction  from  one  of  them 
is  of  but  little  value.  At  times  it  is  of  positive  dis- 
advantage. In  other  words,  in  such  cases  the  party 
with  an  enterprise  might  better  appear  before  the 
promoter's  friends  as  a  perfect  stranger  than  to  be 
introduced — and  thereby  discredited — by  the  promoter 
himself. 

It  is  easily  seen  that  the  class  of  business  that  would 
usually  come  to  these  promoters  is  not  of  the  highest. 
A  good  enterprise  could  only  come  through  their  hands 
by  accident.  For  this  reason  the  mere  fact  of  an  enter- 
prise being  in  their  hands  is  sufficient  to  cast  suspicion 
upon  it. 

These  promoters  are  always  ready  for  new  business 
of  any  kind,  and  demand  a  handsome  interest,  com- 
mission or  percentage  for  their  services,  but  are  usually 
willing  to  make  large  concessions  if  necessary.  In 
any  case,  they  are  quick  to  see  an  opportunity  to  secure 
an  advance,  or  expense  money,  or  any  other  contribu- 
tion from  their  client.  They  usually  demand  contracts, 
are  always  ready  to  tie  their  victims  up  indefinitely 
if  they  can,  and  when  they  do  secure  an  enterprise  to 
promote,  distribute  prospectuses  as  freely  as  the  cost 
of  these  prospectuses  will  permit,  pass  the  enterprise 
along  to  all  their  confreres  of  the  promoting  clan, 
and  "hawk"  it  generally  and  widely.  It  is  discredited 
by  the  mere  fact  of  their  presentation.  Occasionally, 
of  course,  such  promoters  do  get  hold  of  a  good  enter- 


"promoters"  and  "financiers."  459 

prise  and  succeed  in  interesting  other  promoters  of 
more  influence,  or  even  reach  men  with  money,  but 
as  a  rule  the  man  with  the  enterprise  had  better  give 
them  a  wide  berth. 

Another  related  class  of  promoters  are  those  en- 
gaged to  a  greater  or  less  extent  in  the  gold  brick 
industry.  These  promoters  or  brokers  are  of  a  finan- 
cial standing  usually  a  little  better  than  those  described 
though  their  moral  standing  is  a  little  worse.  These 
men  find  it  difificult  to  "lie  up  to  the  truth"  when 
describing  their  enterprises,  and  their  first  rule  of  ac- 
tion is  to  get  money — honestly  if  they  can.  These 
men  usually  have  a  very  clear  perception  of  the  real 
merits  of  the  enterprises  which  they  undertake.  They 
prefer,  however,  the  easier  promotion  of  a  fraudulent 
or  semi-fraudulent  enterprise,  with  its  ready  returns 
from  a  people  that  "like  to  be  humbugged,"  to  the 
slower  and  more  hardly  earned  returns  of  a  sounder 
undertaking — if,  indeed,  they  could  finance  such  an 
undertaking. 

It  is  obvious  that  a  mining  proposition  costing  but 
a  few  thousand  dollars,  remote  from  investigation, 
capitalized  at  some  millions  of  dollars  and  with  the 
hopes  or  imaginations  of  the  promoters  supplying  the 
"facts"  for  its  presentation,  can  offer  attractions  that 
no  honest  undertaking  can.  Also,  as  a  matter  of 
practice,  it  will  secure  money  with  an  ease  and  abun- 
dance— so  long  as  the  public  continue  to  exemplify 
the  old  proverb  in  regard  to  a  fool  and  his  money — 
that  cannot  be  equalled  by  the  most  meritorious  of 
honest  enterprises. 

The  men  who  promote  these  schemes  depend   for 


460  FINANCING   AN    ENTERPRISE. 

their  continued  success  upon  the  very  large  number  of 
people  to  whom  they  can  appeal,  and  are  aided  by  the 
aversion  of  the  ordinary  man  to  mention  the  fact  of 
his  having-  been  worsted  in  an  investment.  If  their 
present  clients  are  defrauded — or  to  put  it  more  ele- 
gantly, if  their  investments  turn  out  "unfortunately" — 
the  broker  or  promoter  in  the  case  esteems  the  matter 
of  minor  importance  so  long  as  it  is  not  made  public, 
or  if  it  is  made  public,  so  long  as  his  name  is  not 
connected  therewith.  There  are  plenty  of  fresh  vic- 
tims to  prey  upon,  and  with  these  the  previous  history 
of  the  promoter  is  not  prejudicial  because  unknown. 
When  it  does  become  generally  known  the  promoter 
changes  his  name,  and  freed  thereby  from  the  dead 
weight  of  his  well-earned  reputation,  and  carrying 
with  him  a  full  equipment  of  loaded  dice,  he  starts 
afresh  elsewhere  in  the  battle  of  life. 

Another  class  constantly  verging  on  the  edge  of 
misrepresentation  and  not  infrequently  passing  over 
on  the  other  side,  is  composed  of  impecunious  owners 
or  promoters  of  enterprises  yet  to  be  financed.  In 
many  cases  these  men  have  brought  their  enterprises 
to  the  existing  condition  by  material  sacrifices,  and  in 
almost  every  case  they  feel  that  their  entire  future 
depends  upon  their  success  in  this  particular  under- 
taking. Often  they  are  relying  upon  the  money  ob- 
tained from  their  "deals"  for  actual  living  expenses. 
Add  to  this  the  fact  that  generally  and  naturally  their 
enterprises  are  either  in  bad  condition,  impractical, 
worthless  or  held  by  uncertain  tenure,  and  the  diffi- 
culties of  their  position  are  apparent.  Money  must  be 
had.     It  is  needed  not  only  in  their  businesses,  but 


"promoters"  and  "financiers/'  461 

to  obtain  the  necessaries  of  life  for  themselves  and 
perhaps  those  depending  upon  them.  Believing  as  they 
usually  do  to  the  utmost  in  the  value  and  future  profits 
of  their  undertakings,  these  promoters  feel  that  if  they 
can  get  money  in  any  way,  even  though  the  bounds 
of  prudence  or  honesty  be  overstepped,  they  are  right 
in  so  doing;  that  the  ends  to  be  attained  amply  justify 
the  means,  and  that  in  the  final  "round-up,"  their 
victims  will  be  glad  they  were  brought  in,  even  though 
the  representations  that  secured  them  verged  on  mis- 
representation, because  of  the  great  wealth  that  will 
then  be  theirs.  Promoters  of  this  kind  are  usually 
willing  to  assist  in  promoting  the  enterprises  of  others. 
They  are  always  on  the  lookout  for  funds.  As  a 
class  they  are  not  to  be  taken  seriously,  but  consider- 
able caution  is  advisable  in  dealing  with  the  individual. 


CHAPTER  XXXIX. 
COMMISSIONS  AND  BONUSES. 


When  financing  an  enterprise  the  owner  may  be  call- 
ed upon  to  pay  commissions  or  compensation  for  ser- 
vices rendered,  as  follows : 

(i)   To  parties  who  effect  a  sale,  when  the  matter 
is  one  involving  a  sale. 

(2)  To  parties  who  directly  secure  money  for  the 

enterprise,  whether  by  sale  of  stock  or  other 
securities,  or  by  the  sale  of  an  interest  in 
the  enterprise. 

(3)  To   parties   who   interest   other   parties,   these 

other  parties  bringing  money  into  the  enter- 
prise. 

(4)  To  parties  who  give  introductions  leading  di- 

rectly or  indirectly  to  money. 

Commissions  under  the  first  head — that  is,  to  par- 
ties who  make  a  sale  of  the  subject  matter  of  the 
enterprise,  as  an  invention,  mine,  etc. — are  simple. 
Such  a  transaction  is  usually  clean-cut  and  a  fair  com- 
mission is  easily  determined,  although  there  is  no 
absolute  rule.  A  sale  of  real  estate  in  New  York 
City  carries  a  commission  of  one  per  cent,  in  the  ab- 
sence of  other  agreement.     Five  per  cent,  is  supposed 

462 


COMMISSIONS   AND   BONUSES.  463 

to  be  the  proper  commission  for  the  sale  of  a  mine. 
For  general  offerings  there  is  no  understood  amount, 
the  matter  being  a  subject  of  special  agreement  in  each 
case. 

Under  the  second  head,  where  the  parties  sell  stock 
or  bonds  or  an  interest  in  an  enterprise,  the  conditions 
are  more  difficult,  but  the  matter  is  still  usually  clean- 
cut  and  the  commission  or  compensation  paid  the 
broker  or  promoter  is  not  difficult  of  arrangement. 
This  is  usually  a  percentage  of  the  money  secured,  or 
perhaps  some  stock  interest  ranging  from  five  to  twen- 
ty-five per  cent,  or  even  more.  Or  sometimes  a  certain 
amount  of  stock  will  be  given  the  agent  or  promoter 
in  payment  for  his  services,  this  amount  having  no 
relation  to  the  cash  secured,  or  at  times  the  owner 
of  the  enterprise  will  turn  over  a  block  of  stock  to 
the  promoter  with  which  to  raise  the  needed  funds 
leaving  the  promoter  to  save  what  he  can  out  of  this 
stock  for  himself. 

Under  the  third  head,  where  parties  interest  others, 
these  latter  securing  the  money  for  the  enterprise,  the 
conditions  are  apt  to  be  harder.  The  immediate  par- 
ties do  nothing  beyond  interesting  others  who  may 
perhaps  secure  the  needed  money  from  still  other  par- 
ties. If,  however,  the  money  comes  in,  the  first  par- 
ties who  occupy  the  position  of  "connecting  links"  are 
entitled  to  a  fair  payment,  the  amount  of  which  should 
be  agreed  upon  in  advance  and  which  is  sometimes 
difficult  of  estimation.  If,  however,  the  money  comes 
only  in  part,  or  comes  in  conditionally,  the  matter 
may  become  complicated,  and  still  more  so  when,  as 
sometimes   happens,    the    matter   passes   through    the 


464  FINANCING   AN    ENTERPRISE. 

hands  of  two  or  three  parties  before  the  actual  investor 
is  reached,  each  of  these  parties  demanding  payment 
for  his  services. 

In  a  recently  decided  case  this  very  point  came  up. 
A  Boston  broker  was  appealed  to  for  money  to  de- 
velop a  mine.  He  agreed  to  undertake  the  matter 
on  condition  that  he  receive  a  commission  of  ten  per 
cent,  if  he  secured  the  money,  either  directly  or  indi- 
rectly. Not  being  able  to  raise  the  money  himself, 
he  introduced  his  client  to  a  New  York  broker,  who 
also  made  a  commission  agreement  with  the  owner 
of  the  mine.  The  New  York  broker  in  his  turn  failed 
to  get  the  money  directly,  so  introduced  the  mine 
owner  to  a  third  party.  This  third  party  also  made 
a  contract  for  compensation  with  the  long-suffering 
mine  owner  and  then  got  the  money.  The  Boston 
broker  was  supposed  to  have  been  eliminated  by  this 
time,  but  hearing  that  the  enterprise  was  financed, 
he  promptly  brought  suit  for  his  commission  and  won 
his  case  in  the  lower  courts,  only  failing  to  collect 
because  the  whole  enterprise  went  to  pieces. 

Commissions  under  the  fourth  head — for  introduc- 
tions— frequently  strike  those  unfamiliar  with  the 
practice  as  peculiar  and  uncalled  for.  Under  ordinary 
circumstances,  and  particularly  in  the  smaller  towns 
and  cities,  if  a  man  cannot  or  will  not  put  money 
into  an  offered  enterprise  himself,  but  thinks  a  friend 
or  an  acquaintance  may  be  disposed  to  do  so,  he  will 
introduce  the  owner  of  the  enterprise  to  this  friend 
or  acquaintance  as  a  matter  of  course  and  of  courtesy, 
without  expectation  of  profit.  In  the  larger  cities, 
however,   and  especially  in  financial  circles,  an  "un- 


COMMISSIONS   AND   BONUSES.  465 

paid"  introduction  leading  to  money  would  be  regard- 
ed as  an  amazing  and  inexcusable  disregard  of  the 
proprieties  of  business. 

The  practice  is  not  without  justification.  In  finan- 
cial circles  a  man  regards  his  moneyed  friends  and 
connections  as  part  of  his  capital.  If  he  needs  money 
for  a  good  enterprise  he  can  probably  get  it  from  them. 
Their  capacity  is,  however,  limited.  If  then,  he  "taps" 
these  money  reserves  by  introducing  a  friend  or  a 
business  acquaintance  with  an  enterprise  to  finance,  he 
looks  upon  the  proceeding  as  in  effect  parting  with  a 
portion  of  his  capital  and  demands  payment  accord- 
ingly. 

Or  from  another  standpoint,  he  may  look  on  it  that 
he  cannot  help  the  man  with  the  enterprise  directly, 
but  he  can  indirectly,  and  that  he  is  just  as  clearly 
entitled  to  payment  for  this  partial  assistance  as  if 
he  did  the  whole  thing — not  to  so  much,  perhaps, 
but  still  to  a  substantial  compensation.  Be  the  ethics 
what  they  may,  the  fact  remains  that  in  promoting  and 
financing  circles  a  commission  or  payment  is  expected 
for  introductions  made  for  the  purpose  of  securing 
money,  when  money  is  secured  thereby,  and  further 
it  may  be  said  that  this  payment  can  be  exacted  by 
legal  proceedings  unless  it  is  clearly  understood  that 
no  such  obligation  is  incurred  by  the  party  introduced. 

There  is  no  rule  or  custom  as  to  the  amount  of 
such  a  commission.  Usually  an  agreement  will  be 
made  that  a  commission  is  to  be  paid  if  money  is 
secured,  this  commission  either  being  a  percentage  or 
some  fixed  sum.  In  one  case  the  owner  of  some  valu- 
able oil   properties  paid   several   thousand   dollars   in 


466  FINANCING    AN    ENTERPRISE. 

cash  for  such  an  introduction,  the  payment  being  due 
as  soon  as  the  introduction  was  made,  without  regard 
to  results.  Such  an  arrangement  is  not,  of  course, 
usual. 

When  arranging  for  an  introduction  of  the  kind, 
care  should  be  taken  that  the  liabilities  for  commis- 
sions extend  only  to  money  secured  for  the  matter 
in  hand.  Otherwise  the  introducer  may  claim  a  com- 
mission on  further  business  transacted  between  the 
introduced  parties  for  an  indefinite  length  of  time.  In 
the  absence  of  an  express  agreement  to  that  effect, 
such  a  continuing  claim  could  not  ordinarily  be  en- 
forced, but  trouble  may  be  saved  by  a  distinct  under- 
standing that  commissions  are  only  to  be  due  on  the 
one  particular  transaction. 

As  to  the  amount  of  commissions  in  general  no 
fixed  rules  exist.  It  will  depend  largely  on  the  condi- 
tions. If  a  man  has  a  first-class  enterprise,  attractive 
in  nature  and  in  good  shape,  and  particularly  if  he  is 
not  harassed  by  personal  financial  necessities,  or  the 
necessities  of  the  enterprise,  he  will  have  to  pay  a  fair 
commission,  but  not  at  all  an  excessive  one.  His 
commission  payment  then  would  probably  range  from 
five  to  ten  per  cent,  of  the  amount  secured,  or  perhaps 
some  lump  amount  in  securities  of  the  enterprise  would 
be  agreed  upon.  If  the  enterprise  is  not  quite  so 
meritorious,  or  the  financial  condition  of  the  owner 
is  not  so  good,  the  commission  rate  will  run  liii^her, 
probably  from  ten  to  twenty-five  per  cent.  With  a 
doubtful  enterprise  or  a  desperate  need  of  finance,  the 
commission  demanded  will  run  up  to  an  indefinite 
percentage. 


COMMISSIONS   AND   BONUSES.  467 

The  matter  is  also  frequently  complicated  by 
changes  in  the  terms  on  which  funds  are  obtained. 
It  is  but  seldom  that  money  for  an  enterprise  is  ob- 
tained on  the  proposition  first  made,  especially  where 
the  conditions  of  the  enterprise  are  not  of  the  best. 
The  men  with  money  are  usually  good  business  men 
and  have  very  clear  ideas  as  to  the  merits  of  a  propo- 
sition, and  if  it  is  not  in  the  best  shape  or  not  in  the 
shape  that  suits  them,  have  no  hesitation  in  suggesting 
changes.  Usually  the  man  with  an  enterprise  will 
find  it  of  advantage  to  meet  any  reasonable  demands 
and  then  if  commissions  have  been  arranged  on  the 
basis  of  the  original  proposition,  without  some  pro- 
vision for  changes  therein,  a  fair  adjustment  of  the 
matter  may  be  very  difficult. 

Frequently  when  dealing  with  a  promoter,  the 
owner  will  name  his  best  terms,  or  as  otherwise  ex- 
pressed, will  fix  a  flat  price  for  the  interest  offered 
and  then  let  the  promoter  raise  the  necessary  money 
and  save  or  make  as  much  for  himself  as  he  can — per- 
haps within  fixed  limits.  For  instance,  the  owner  of 
an  enterprise  may  be  willing  to  give  a  half  interest 
for  the  money  he  requires,  the  amount  being  stipulated. 
He  turns  the  whole  matter  over  to  his  promoter  under 
an  agreement  to  deliver  fifty  per  cent,  of  the  enter- 
prise as  a  consideration  for  the  designated  amount, 
expressly  stipulating  that  he  shall  not  be  liable  for 
any  commissions  or  for  any  expenses  incurred  by  the 
promoter  in  his  work.  This  does  not  provide  any 
specific  commission  for  the  promoter,  who  must  then 
make  his  profits  the  best  way  he  can. 

If  the  enterprise  is  a  desirable  one,  and  the  promo- 


468  FINANCING    AN    ENTERPRISE. 

ter  a  man  of  fair  ability,  he  may  perhaps  induce  the 
parties  with  whom  he  is  working  to  allow  him  some 
payment  for  his  services.  In  the  ordinary  enterprise 
this  is,  however,  a  somewhat  difficult  matter,  as  the 
man  with  the  money  is  almost  sure  to  demand  at  least 
fifty  per  cent,  of  the  undertaking  in  return  for  the 
money  he  invests,  and  is  not  inclined  to  give  any  of 
it  to  the  promoter.  Ordinarily,  therefore,  the  pro- 
moter cannot  look  to  the  purchaser  for  a  commission, 
and  he  would  then  probably  increase  or  "load"  the 
price  of  the  half  interest  before  offering  it  for  sale, 
with  the  expectation  of  retaining  the  excess  amount 
as  his  compensation.  This  practice  is  common  and  is 
not  open  to  objection — legal  or  otherwise — provided 
that  the  increase  is  reasonable  in  amount  and  that  the 
promoter  appears  in  the  matter  as  the  agent  of  the 
owner. 

To  guard  against  excessive  loading  when  a  "flat" 
price  is  given,  the  owner  should  fix  some  maximum 
figure  above  which  the  broker  or  promoter  may  not 
go.  Theoretically  the  promoter  would  himself  stop 
at  a  reasonable  price,  but  in  practice  he  does  not  do 
this,  frequently  loading  so  heavily  that  success  is  im- 
possible. Some  price  limitation  is  therefore  very 
desirable. 

When  the  services  of  a  broker  or  promoter  are  re- 
tained, a  written  commission  agreement  is  customary 
and  very  desirable.  This  may  be  as  formal  or  in- 
formal as  desired,  provided  it  is  clear.  A  proposition 
in  ordinary  letter  form,  addressed  to  the  promoter  and 
making  him  a  direct  offer  will,  when  accepted  by  him, 
be  quite  as  effective  and  binding  as  the  most  formal 
contract. 


COMMISSIONS   AND   BONUSES.  469 

The  details  of  the  agreement  should,  however,  no 
matter  what  its  general  form,  be  expressed  with  abso- 
lute clearness.  Usually  the  agreement  will,  if  of  any 
importance,  be  drawn  by  the  attorneys  of  the  interest- 
ed parties,  but  in  any  case  these  parties  should  see 
that  the  important  points  which  follow  are  properly 
and  clearly  covered. 

( 1 )  The  agreement  should  designate  specifically  the 
enterprise  covered  by  its  terms.  Also  the  general  plan 
or  proposition  on  which  it  is  to  be  financed  should  be 
stated  broadly  at  least.  This  should  be  done  for  the 
sake  of  clearness  and  to  aid  in  the  interpretation  of 
the  contract  provisions. 

(2)  The  agreement  should  be  confined  to  the  im- 
mediate issue — that  is,  it  should  apply  clearly  and 
unmistakably  to  the  one  enterprise  then  in  hand,  and 
to  work  performed  in  connection  with  that  enterprise 
and  in  accordance  with  the  terms  agreed  upon.  Fre- 
quently a  commission  agreement  will  be  so  vague  in 
its  terms  as  to  raise  the  question  whether  it  does 
not  also  include  other  undertakings  which  the  owner 
of  the  enterprise  may  perhaps  be  financing  then  or  take 
up  later. 

(3)  The  agreement  should  be  clearly  defined  as  to 
scope.  Frequently  a  promotion  contract  for  patent 
or  other  rights,  intended  to  apply  only  to  the  United 
States,  will  be  so  loosely  drawn  that  the  promoter  can 
claim  to  control  foreign  rights  as  well.  If  the  agree- 
ment is  intended  to  apply  only  to  the  United  States 
or  to  some  portion  of  it,  or  if  otherwise,  the  condi- 
tions should  be  clearly  stated. 

(4)  The  agreement  should  be  limited  as  to  time, 


470  FINANCING    AN    ENTERPRISE. 

particularly  when  the  rights  granted  are  exclusive. 
Usually  a  promoter — and  not  improperly — will  de- 
mand an  exclusive  control  of  some  kind,  but  if  so  the 
time  at  which  such  control  will  terminate  should  be 
definitely  fixed.  If  this  is  not  done,  the  promoter 
may  be  unable  to  finance  the  enterprise  promptly,  or 
will  perhaps  not  push  the  matter  at  all,  and  then  when 
the  owner  becomes  impatient  or  finds  other  oppor- 
tunities to  get  the  money  he  needs,  the  whole  thing 
may  be  held  up  by  the  promoter  until  he  is  paid  for 
its  release.  Also,  if  the  promoter  will  consent,  it  is 
wise  to  provide  some  means  of  terminating  the  agree- 
ment before  the  specified  time  should  the  owner  find 
other  channels  of  financing,  provided,  of  course,  that 
no  binding  obligations  have  been  entered  into  at  that 
time  by  the  promoter.  In  such  case  the  promoter 
would  probably — and  properly — require  that  some 
proportion  of  his  commission  should  be  paid  as  com- 
pensation for  his  trouble  in  the  matter. 

(5)  The  agreement  should  make  provision  for  any 
partial  fulfilment  of  its  terms.  The  promoter  may 
secure  but  a  portion  of  the  required  money  within 
the  specified  time.  It  should  therefore  be  provided 
that  the  owner  is  at  liberty  either  to  accept  or  reject 
these  partial  subscriptions.  In  case  of  acceptance  the 
promoter  would  of  course  ha\c  a  pro  rata  commission 
on  the  amounts  actually  obtained. 

(6)  The  agreement  should  provide  for  any  modifi- 
cation or  readju.stment  of  the  original  plan.  As  al- 
ready stated,  it  is  but  seldom  that  an  enterprise  is 
financed  along  the  lines  first  laid  down,  and  some 
flexibility  in  this  respect  in  the  commission  agreement 


COMMISSIONS   AND   BONUSES.  47 1 

is  therefore  desirable.  Without  it  the  owner  may  in 
the  course  of  the  negotiations  have  an  advantageous 
proposition  on  a  modified  basis,  but  be  unable  to  ac- 
cept it  on  account  of  the  rigid  terms  of  the  commission 
agreement — that  is,  the  promoter  may  then  have  it 
in  his  power  to  hold  up  the  whole  matter  until  terms, 
satisfactory  to  him,  are  agreed  upon,  or  until  his  full 
commissions  have  been  paid. 

To  cover  this  point  the  agreement  might  provide 
that  in  case  of  any  change  in  the  proposition  the  com- 
missions shall  be  settled  by  reference  to  a  third  party 
if  the  principals  cannot  agree. 

(7)  The  agreement  should  state  with  precision  the 
commissions  that  are  to  be  paid  and  whether  these 
commissions  are  payable  in  cash  or  in  securities.  If 
the  latter,  the  securities  intended  should  be  clearly 
designated. 

(8)  The  agreement  should  specify  whether  the  com- 
missions are  payable  on  the  net  amount  secured  or  on 
the  gross  amount  before  deductions  are  made  for  ex- 
penses. If  not  otherwise  specified,  the  commission 
would  be  payable  on  the  gross  amount. 

(9)  The  agreement  should  state  when  and  how 
commissions  are  payable.  Unless  otherwise  stipulated, 
commissions  are  payable  as  soon  as  the  owner  of  the 
enterprise  reaches  a  definite  agreement  with  the  par- 
ties who  are  to  invest.  Then,  perhaps  before  the 
owner  has  received  any  money,  the  promoter  may 
legally  claim  and  enforce  payment  of  his  commission. 
To  provide  against  this  the  commission  agreement 
should  state  that  commissions  are  payable  only  when 
and  as  payments  are  received  by  the  owner  of  the  en- 


472  FINANCING   AN    ENTERPRISE. 

terprise.  If  a  part  of  the  commission  is  payable  in 
securities,  the  time  of  deHvery  for  these  securities 
should  be  clearly  stated. 

(lo)  If  the  promoter  is  himself  to  pay  the  expenses 
of  his  effort  to  secure  money,  it  is  advisable  that  this 
be  specified  in  the  contract.  The  promoter  might  not 
be  able  to  substantiate  a  claim  for  expense  payments 
even  without  specification,  but  to  avoid  trouble  the 
matter  should  be  clearly  stated. 

The  bonus  differs  from  the  commission.  A  com- 
mission is  a  payment  for  services  rendered;  a  bonus 
is  something  in  addition  to  this  payment,  or,  speaking 
generally,  it  is  a  donation  or  gift  given  as  an  induce- 
ment for  the  accomplishment  of  some  special  end. 
For  instance,  the  owner  of  the  enterprise  may  enter 
into  a  commission  agreement  with  a  promoter  in  which 
the  amounts  of  commission  are  specified.  The  owner 
may  then  offer  a  bonus  in  addition  to  this  commission 
if  the  promoter  will  complete  the  matter  within  a  speci- 
fied time.  Or  if  bonds  are  to  be  sold,  a  certain  amount 
of  stock  is  frequently  given  as  a  bonus.  In  this  case 
the  bonds  are  offered  at  a  certain  price  and  the  stock 
is  thrown  in  without  direct  consideration,  as  an  addi- 
tional inducement  for  the  purchase  of  the  bonds.  Or 
sometimes  a  bonus  or  gift  of  stock  will  be  given  to 
some  influential  party  merely  to  secure  the  use  of  his 
name,  perhaps  as  a  director  or  possibly  merely  as  a 
stockholder.  It  is  also  quite  common  to  give  a  bonus 
of  common  stock  when  preferred  stock  is  offered  for 
sale,  especially  if  the  preferred  stock  does  not  carry 
the  right  to  vote.  At  other  times  cash  bonuses  are 
employed  on  the  same  general  lines. 


COMMISSIONS    AND   BONUSES.  473 

Bonuses  of  the  kinds  discussed  are  common  and  are 
frequently  employed  to  much  advantage.  At  times 
they  add  materially  to  the  attractiveness  of  corporate 
offerings,  and  are  used  in  other  matters  to  good  effect. 
Within  the  knowledge  of  the  writer  a  bonus  of  $5,000 
in  cash  was  paid  a  prominent  firm  of  attorneys  to 
allow  their  names  to  appear  as  counsel  of  a  certain 
enterprise.  In  addition  to  this  substantial  payment  the 
attorneys  received  their  regular  fees  for  all  the  work 
done  by  them  in  connection  with  the  enterprise,  tlie 
first  amount  figuring  ])urely  as  a  retainer.  The  solidity 
given  to  the  enterprise  by  the  appearance  of  these 
responsible  parties  as  its  attorneys,  was  considered,  and 
probably  was  worth  the  full  amount  paid  them. 
Whether  it  was  a  strictly  professional  proceeding  on 
the  part  of  the  attorneys  is  another  question.  It  is 
presumable  that  they  investigated  the  enterprise  thor- 
oughly and  satisfied  themselves  of  its  real  worth  be- 
fore entering  into  the  arrangement. 


CHAPTER  XL. 
LEGAL    ASSISTANCE. 


There  are  times  in  the  financing  of  any  enterprise 
of  material  value  when  legal  assistance  is  desirable 
and  perhaps  essential.  If  a  development  contract  is 
to  be  entered  into,  if  a  partnership  is  to  be  formed, 
if  a  corporation  is  to  be  organized,  and  particularly 
if  promoters  are  to  be  dealt  with,  or  if  contracts  are 
to  be  drawn  up  with  moneyed  men  who  are  to  finance 
or  be  otherwise  interested  in  the  enterprise,  a  lawyer 
should  be  employed. 

This  proposition  requires  but  scant  comment.  It  is 
a  lawyer's  business  to  understand,  to  advance  and  to 
safeguard  the  interests  of  his  clients  in  matters  of 
this  kind,  and  just  as  a  machinist  is  employed  to  con- 
struct a  model,  or  a  physician  to  treat  some  serious 
ailment,  so  should  a  lawyer  be  employed  in  the  formali- 
ties connected  with  the  financing  of  an  enterprise.  In 
the  less  important  preliminaries,  or  when  the  whole 
matter  is  perhaps  merely  one  of  discussion,  he  may 
not  be  needed.  When,  however,  the  point  of  fixed 
agreement  is  approached,  his  services  are  very  desira- 
ble. They  may,  of  course,  be  dispensed  with,  but  such 
"dispensation"  is  apt  to  be  a  reckless  and  extravagant 
proceeding. 

The  man   who  is  not  versed   in   the  law  and   not 

474 


LEGAL   ASSISTANCE.  475 

familiar  with  contracts  cannot  safely  write  one  or  pass 
upon  one  already  written.  He  may  understand  the 
English  language  well,  but  will  be  totally  unable  to 
see  the  pitfalls  concealed  in  the  legal  phraseology  of  a 
well-drawn  contract.  He  may  be  able  to  write  with 
accuracy  and  even  elegance,  but  being  unacqnainlcd 
with  the  requirements  of  the  law  and  not  knowing 
the  "danger  points"  of  an  agreement,  he  is  as  little 
qualified  to  draft  a  contract  as  he  is  to  argue  a  case 
in  court. 

All  through  the  procedure  of  financing  the  man  un- 
familiar with  the  law — if  acting  without  an  attorney — • 
is  working  at  a  serious  and  even  dangerous  disad- 
vantage. He  will  stumble  into  a  partnership — as  is 
frequently  done  without  intent  when  the  owner  of  the 
enterprise  and  the  man  with  money  join  forces — with- 
out the  least  idea  of  the  responsibilities  assumed,  the 
risks  involved  or  the  best  arrangements  to  be  made. 
If  a  corporation  is  to  be  organized  he  may  perhaps 
be  able  to  comply  with  the  statutory  formalities  and 
may  carry  through  the  organization.  If  he  does,  it 
will  be  but  lamely,  and  his  corporation  will  also  usu- 
ally limp.  Something  of  advantage  will  be  omitted, 
something  unnecessary  or  even  injurious  will  be  in- 
cluded, and  not  one  time  in  a  hundred  will  the  cor- 
porate organization  be  so  arranged  as  to  secure  all  the 
available  advantages  and  the  best  possible  working 
mechanism.  An  unskilled  man  is  groping  in  the  dark 
and  it  would  be  strange  if  he  should  attain  the  best 
results. 

Particularly,  as  has  been  said,  should  a  lawyer  be 
retained  when  negotiations  are  to  be  carried  on  v.-ith 


4/6  FINANCING    AN    ENTERPRISE. 

promoters  and  moneyed  men.  As  a  rule  these  men 
are  naturally  acute  and  are  experienced  in  the  matters 
involved.  They  know  exactly  what  advantages  are 
to  be  gained  and  how  to  gain  them.  They  are  them- 
selves usually  assisted  by  or  are  in  consultation  with 
first-class  lawyers,  but  even  if  they  are  not,  the  man 
with  an  enterprise  should  not  be  thereby  lulled  into 
fatuous  security.  The  probabilities  are  that  they 
are  so  familiar  with  the  matters  in  hand,  know  so 
thoroughly  every  trick  to  be  turned,  and  are  so  versed 
in  the  related  requirements  of  law  and  business  that 
no  lawyer  is  needed  to  protect  their  interests.  In  all 
cases  he  may  rest  assured  that  lawyers  are  within  easy 
reach  should  the  need  arise,  and  if  the  man  with  the 
enterprise  is  not  similarly  prepared  he  is  hopelessly 
outclassed  from  the  start.  Then,  if  he  finds  that  his 
contract  means  a  little  more  or  a  little  less  than  he 
supposed,  or  finds  that  the  control  has  been  taken 
from  his  hands  without  adequate  provision  for  his 
protection,  or  finds  that  something  else  essential  to  his 
interests  has  been  omitted,  or  that  something  injurious 
to  his  interests  has  been  included,  he  has  no  one  to 
blame  but  himself.  He  has  gone  as  a  sheep  to  the 
shearing,  and  if  he  returns  more  or  less  shorn  it  is 
but  the  happening  of  the  expected. 

The  man  with  an  enterprise  will  sometimes,  how- 
ever, not  only  omit  to  employ  a  lawyer  of  his  own, 
l)ut  will  actually  leave  the  whole  matter  in  the  hands 
of  the  attorneys  on  the  other  side.  At  this  time  the 
relations  between  all  the  parties  are,  as  a  rule,  pleasant, 
the  lawyers  employed  by  the  people  with  whom  he  is 
negotiating  arc  perhaps  men  to  inspire  confidence,  and 


LEGAL   ASSISTANCE.  477 

the  man  with  the  enterprise  feels  that  he  is  safe  in 
their  hands.  In  consequence  he  allows  them  to  ar- 
range the  details  and  to  draw  the  papers,  merely 
checking  up  on  the  main  points  and  trusting  to  their 
explanations  of  any  matters  he  does  not  understand. 

The  folly  of  such  a  proceeding  cannot  be  too  strong- 
ly condemned.  It  has  been  said  that  a  man  who  is 
his  own  lawyer  has  a  fool  for  his  client,  but  the  term 
is  not  strong  enough  to  describe  the  man  who  looks 
to  the  other  man's  lawyer  for  his  own  protection.  It 
is  but  rarely,  if  ever,  that  the  interests  of  the  parties 
on  the  two  sides  of  a  deal  are  the  same.  Then,  for 
the  man  with  the  enterprise  to  entrust  his  interests  to 
an  attorney  retained  by  the  opposing  parties,  is  un- 
wise, to  say  the  least.  No  man  can  serve  two  masters 
and  no  matter  how  honorable  an  attorney  may  be, 
he  can  rarely  represent  the  two  parties  to  a  transaction 
with  entire  justice  to  both.  His  first  duty  is  to  the 
man  who  employs  him,  and  if  either  party  is  to  be 
favored,  his  employer  will  undoubtedly  and  properly 
be  the  favored  one. 

For  instance,  if  a  contract  is  to  be  drawn  up  with 
a  promoter,  it  may  be  so  worded  as  to  be  an  exclu- 
sive and  perpetual  one — that  is,  one  that  will  tie  the 
enterprise  up  indefinitely  if  the  promoter  does  not 
succeed  in  his  financing.  Such  a  contract  clause  is 
much  desired  by  the  ordinary  promoter.  Certainly, 
then,  the  lawyer  of  that  promoter  should  not  and 
would  not  think  of  calling  attention  to  this  feature 
of  the  contract  if  the  owner  of  the  enterprise  did  not 
see  it  himself.  If  such  a  contract  is  executed,  the 
enterprise  is  practically  mortgaged  to  the  promoter, 


47^  FINANCING    AN    ENTERPRISE. 

the  owner  will  find  much  trouble  in  releasing  it  and 
usually  before  the  enterprise  can  be  financed  by  the 
owner,  or  anyone  else,  the  promoter  must  first  be  paid 
his  full  commission,  or  perhaps  some  smaller  amount 
agreed  upon  as  a  compromise. 

Or  again,  the  inventor  may  be  entering  into  a  con- 
tract for  the  operation  of  his  patent.  Here  a  number 
of  important  points  must  be  covered.  Perhaps  in  the 
particular  instance,  a  satisfactory  royalty  may  be  pro- 
vided, but  no  fixed  minimum  production.  Such  an 
omission  is  not  infrequent  in  royalty  contracts  and  is 
directly  in  the  interests  of  the  party  with  whom  the 
inventor  is  contracting.  Certainly  the  attorneys  for 
this  other  party  would  not  and  could  not  properly  call 
the  omission  to  the  inventor's  attention.  Then  the 
unhappy  inventor,  not  being  familiar  with  the  subject, 
is  not  himself  apt  to  discover  the  damaging  omission 
at  all,  or  should  he  do  so,  does  not  usually  realize 
its  significance  until  too  late.  Then,  when  the  contract 
is  closed,  if  the  manufacturer  does  not  care  to  operate 
under  the  patent  he  cannot  be  forced  to  do  so,  the 
inventor  receives  no  royalty,  finds  himself  hopelessly 
tied  up  and  has  no  recourse  of  any  kind  save  to  abuse 
himself  for  the  reckless  disregard  of  ordinary  business 
precautions  which  has  caused  his  trouble. 

Or  there  may  be  local  laws  or  conditions  that  will 
materially  affect  the  contract,  or  the  general  arrange- 
ments entered  into  by  the  owner  of  the  enterprise,  but 
which  this  latter  knows  nothing  about,  and  if  he  is 
depending  on  the  other  man's  lawyer,  is  not  likely 
to  discover  until  too  late  for  the  proper  protection 
of  his  own  interests. 


LEGAL   ASSISTANCE.  479 

In  short,  the  details  connected  with  the  financing 
of  any  enterprise  of  material  value  are  so  important 
and  there  are  so  many  details,  technical  or  otherwise, 
to  be  observed  that  to  carry  them  through  without  the 
assistance  of  an  attorney  is  a  most  dangerous  waiver 
of  the  rules  of  safe  business.  As  to  those  who  not 
only  fail  to  retain  an  attorney,  but  actually  leave  their 
interests  in  the  hands  of  the  parties  on  the  other  side 
and  the  attorneys  of  those  parties,  it  can  only  be  said 
that  they  deserve  whatever  hard  fate  befalls  them. 
They  are  looking  for  trouble  and  will  doubtless  find  it. 

It  is  obvious  of  course  that  this  necessity  for  legal 
assistance  does  not  exist  to  the  same  degree,  or  at 
all  when  the  matter  is  of  small  value  or  importance 
and  the  parties  on  both  sides,  even  though  unversed 
in  the  law,  are  not  represented  by  lawyers.  A  man 
may  with  reasonable  safety  make  a  contract  in  minor 
matters  with  his  friends  or  neighbors  without  going 
to  the  expense  of  a  lawyer's  fee.  Here  the  contract- 
ing parties  are  in  friendly  relation,  stand  on  an  equal 
basis  in  their  ignorance  of  the  law  and  are  presuma- 
bly desirous  of  a  contract  fair  to  all  parties.  There 
is  no  "playing  for  points,"  and  the  whole  matter  is 
merely  one  of  expressing  the  wishes  of  the  parties  in 
the  plainest,  simplest  language  possible. 

When,  however,  the  man  with  the  enterprise  is  deal- 
ing with  strangers,  and  in  any  case  where  the  amounts 
involved  are  large,  and  particularly  when  attorneys 
are  employed  on  the  other  side,  the  situation  is  entirely 
different  and  the  remarks  that  have  been  made  as  to 
the  importance  of  legal   assistance  apply  with   force. 

While  insisting  on  the  importance  of  legal  aid,  the 


480  FINANCING    AN    ENTERPRISE. 

author  must  admit  that  a  poor  lawyer  is  even  worse 
than  none,  and  that  a  competent  attorney  is  apt  to 
be  costly  and  is  often  difficult  to  secure,  especially 
for  the  stranger.  Also,  if  all  the  profits  of  a  trans- 
action are  to  be  paid  to  lawyers,  they  might  as  well 
be  lost  at  once.  How  then  is  a  stranger  to  tell  the 
good  from  the  bad,  and  how  is  he  to  guard  against 
such  excessive  charges  as  will  be  either  beyond  his 
ability  to  pay,  or  outside  the  justifiable  expenses  of 
the  particular  case? 

In  the  first  place,  any  lawyer  selected  should  be  at 
least  reliable  and  of  reasonable  ability.  If  the  party 
desiring  the  services  of  an  attorney  has  friends  in 
the  particular  city,  they  can  usually  direct  him  to  a 
lawyer  who  is  honest  and  fairly  capable.  The  party 
should  himself  be  able  to  gain  some  idea  of  this  at- 
torney's ability  by  a  preliminary  discussion  of  the 
matter  with  him.  A  reputable  attorney  will  not  make 
any  charge  for  a  short  conference  of  the  kind,  though, 
if  there  is  any  doubt  on  this  point,  the  prospective 
client  may  properly  set  it  at  rest  by  a  direct  enquiry. 

Speaking  generally,  it  is  not  advisable  for  the  man 
with  an  ordinary  enterprise  to  retain  either  an  inex- 
perienced lawyer  or  one  of  much  prominence.  If 
the  matter  is  at  all  complicated  an  inexperienced  law- 
yer cannot  properly  protect  the  interests  of  his  client. 
A  prominent  lawyer,  on  the  other  hand,  may  charge 
much  more  than  the  enterprise  can  afford  to  pay.  In 
a  matter  of  moderate  importance  the  best  results  are 
often  secured  by  the  employment  of  a  young  lawyer 
who  is  not  far  enough  along  to  charge  excessive  fees, 
but  who  has  yet  had  sufficient  experience  to  qualify 


LKGAL    ASSISTANCE  48 1 

him  for  the  work.  He  will,  as  a  rule,  take  far  more 
interest  in  the  matter  than  would  an  older  man,  be 
more  active  in  its  behalf  and  be  more  moderate  in 
his  charges. 

The  legal  fees  in  matters  connected  with  the  financ- 
ing of  an  enterprise  vary  greatly  with  the  work  to 
be  done  and  the  values  involved,  ranging  from  $25 
or  $50  for  the  drafting  of  a  simple  contract  in  some 
ordinary  enterprise,  up  to  the  enormous  amounts  paid 
in  the  larger  flotations.  If  the  client  cannot  afford  a 
large  fee,  or  the  matter  does  not  justify  it,  he  will 
do  well  to  determine  and  arrange  in  advance  for  the 
cost  of  the  services  desired.  No  reputable  lawyer  ob- 
jects to  an  enquiry  of  this  kind.  In  many  cases,  and 
whenever  he  can  do  so  with  safety  and  propriety,  he 
will  name  a  fixed  price.  Usually  he  can  name  a  sum 
which  his  fees  will  not  exceed,  and  always  he  can 
give  some  general  idea  of  his  charges. 

If  the  client's  means  are  limited  it  is  always  ad- 
visable for  him  to  explain  the  situation  fully  to  his 
attorney.  In  such  case  this  latter  will  usually  either 
agree  to  keep  within  some  specified  amount,  or  will 
frankly  tell  his  client  that  he  cannot  do  the  work 
within  the  limits  mentioned  and  will  perhaps  advise 
him  what  had  best  be  done.  Frequently  and  not  im- 
properly, attorneys  Avill  take  all  or  a  portion  of  their 
fees  in  the  securities  of  the  enterprise  to  be  financed, 
or  wait  for  payment  until  some  future  date.  In  either 
of  these  cases  the  attorney  will  properly  expect  a 
much  larger  fee,  particularly  if  it  consists  of  stock 
or  some  other  interest  in  the  enterprise  which  depends 
upon  the  success  of  the  undertaking  to  give  it  a  value, 
than  if  the  payment  were  cash. 


482  FINANCING    AN    ENTERPRISE. 

Unless  some  understanding  is  reached  in  advance, 
the  cHent  not  famihar  with  lawyers'  charges  is  apt 
to  be  very  disagreeably  surprised  when  his  account 
is  rendered.  A  demand  for  thousands  may  come  in 
when  the  client  is  expecting  hundreds,  or  a  charge 
of  hundreds  be  made  when  the  client  is  expecting  a 
modest  fee  of  $25  or  $50.  Any  unpleasant  possi- 
bility of  the  kind  may  always  be  avoided  by  a  prelimi- 
nary discussion  of  the  matter  with  the  attorney. 

The  work  of  the  lawyer  does  not  end  with  the 
mere  formal  preparation  of  legal  instruments.  His 
functions  extend  far  beyond  this.  He  is,  or  should 
be,  a  good  business  man  and  will  advise — and  usually 
advise  wisely — as  to  the  merits  and  details  of  the 
arrangement  to  be  entered  into,  will  make  practical 
suggestions,  and,  if  desired,  will  conduct  or  assist  in 
the  negotiations.  Furthermore,  it  is  to  be  remembered 
that  lawyers  on  occasion  make  very  excellent  promo- 
ters themselves. 

On  the  other  hand,  it  must  be  noted  that  there  are 
members  of  the  legal  profession  who  regard  clients 
as  "their  natural  enemies" — this  expression  coming 
directly  from  an  attorney  who  undoubtedly  acts  on 
this  belief — to  be  preyed  upon  as  may  be  possible,  and 
to  be  protected  from  the  outside  world  only  to  be 
preserved  for  the  benefit  of  their  attorneys.  The  law 
is  not  peculiar  in  this  respect.  All  callings  are  afflicted 
with  disreputable  members,  and  the  shyster  lawyer  is 
a  feature,  not  a  characteristic,  of  the  legal  profession. 
By  enquiry,  by  a  preliminary  discussion  and  by  a 
general  sizing  up  of  the  particular  lawyer,  and  by  an 
advance  discussion  of  fees,  it  should  always  be  possi- 
ble to  avoid  the  clutches  of  unworthy  members. 


LEGAL  ASSISTANCE.  483 

When  a  lawyer  is  secured  the  cHent  should  co- 
operate with  him  in  every  way.  His  attorney,  even 
though  a  good  one,  can  hardly  comprehend  the  matter 
in  all  its  bearings  as  well  as  does  the  client,  or  not 
being  infallible,  may  possibly  make  a  mistake  or  be 
guilty  of  an  oversight,  and  the  client  should  be  at  hand 
to  assist,  to  check  up,  and  to  supplement  as  far  as 
he  can.  It  is  a  matter  in  which  both  are  interested, 
but  in  which  the  client  has  most  at  stake. 


CHAPTER  XLI. 
ADAPTATION  OF  CORPORATE  FEATURES. 


Almost  any  business  arrangement  desired  is  possi- 
ble under  the  corporate  form.  A  few  instances  will 
perhaps  best  illustrate  the  flexibility  of  the  corporate 
system  and  the  manner  in  which  it  may  be  used  to 
further  the  financing  and  development  of  an  enterprise. 

Possibly  an  inventor  may  have  devised  a  new  mech- 
anism. He  wishes  money  to  patent  his  invention  and 
construct  a  model.  He  interests  some  friend  who 
agrees  to  advance  the  few  hundred  dollars  required 
for  this  work  on  condition  that  he  be  given  a  half 
interest  in  the  invention.  They  must  then  either  form 
a  partnership  or  a  corporation.  A  partnership  is  usu- 
ally objectionable  and  they  will  probably  decide  upon 
a  corporation. 

As  discussed  in  a  preceding  chapter  (Chapter  XVI), 
the  amount  of  capitalization  fixed  upon  for  this  cor- 
poration would  usually  be  immaterial.  To  avoid  the 
expense  incident  to  a  large  capitalization,  such  as  state 
fees,  attorneys'  fees,  taxes,  etc.,  the  interested  parties 
would  probably  fix  on  some  small  amount,  say  $i,ooo, 
and  the  corporation  is  formed.  The  inventor  assigns 
his  invention  to  the  corporation,  agrees  to  assign  his 
patents  to  it  when  secured,  and  receives  stock  to  the 
face  value  of  v$500.     His  friend  undertakes  to  supply 

484 


ADAPTATION    OF    CORPORATE    FEATURES.  485 

the  needed  money  up  to  whatever  hmit  may  have  been 
agreed  upon,  and  in  return  receives  the  other  half  of 
the  capital  stock. 

The  corporation  is  then  composed  of  but  two  mem- 
bers or  stockholders,  each  holding  one-half  the  stock. 
If  the  law — as  is  the  case  in  most  states  of  the  Union 
— requires  three  directors,  some  friend,  relative  or  per- 
haps the  wife  of  one  of  the  parties  is  invited  to  act 
as  the  third  director.  The  inventor  and  his  associate 
are  probably  the  only  officers  elected,  most  convenient- 
ly one  as  president  and  the  other  as  secretary  and 
treasurer.  The  little  corporation  is  then  distinctively 
a  "close"  corporation.  It  could  be  managed  with  as 
scant  formality  as  a  partnership,  and  would  run  along 
easily  until  the  necessary  patents  were  secured,  a  model 
constructed  and  the  enterprise  brought  into  shape  for 
financing  and  development. 

At  this  stage  a  larger  corporation  is  desirable.  Two 
courses  are  then  open.  The  capital  stock  of  the  small 
corporation  may  be  increased  or  an  entirely  new  cor- 
poration be  organized.  Usually  the  new  organization 
is  preferred.  Then  the  value  of  the  invention  and, 
based  upon  this,  the  best  capitalization  of  the  com- 
pany— which  before  was  a  matter  of  indifiference — 
becomes  a  question  of  much  importance.  The  manner 
in  which  it  would  usually  be  determined  is  also  dis- 
cussed in  a  preceding  chapter  (Chapter  XVII). 

The  inventor  and  his  friend  are  probably  willing 
to  give  a  half  interest  in  the  enterprise  for  the  money 
necessary  for  its  development.  This  money  might  per- 
haps be  estimated  at  $25,000.  Then  the  capitalization 
might  be  fixed  at  $100,000,  all  presumably  common 


486  FINANCING   AN    ENTERPRISE. 

stock,  of  which  they  will  offer  $50,ocx)  face  value  for 
the  needed  money. 

If  they  settle  on  this  offer  of  $50,000  of  common 
stock  for  their  money  and  wish  to  carry  the  matter 
through  on  this  basis  without  change  and  without 
making  concessions  of  any  kind  to  the  men  with 
money,  they  would  then  organize  the  corporation — 
which  would  make  changes  of  stock  difficult,  whether 
as  to  amount  or  character — and  secure  their  money 
on  the  offered  terms  if  they  could.  Unless,  however, 
the  whole  arrangement  has  been  made  in  advance, 
there  might  be  much  doubt  as  to  whether  the  money 
could  be  raised  on  the  exact  plan  proposed,  and  if  so, 
the  owners  of  the  enterprise  would  not  incorporate, 
but  merely  adopt  the  arrangement  in  a  tentative  way, 
so  that  it  might  be  changed  if  necessary. 

It  is  more  than  probable  that  the  plan  proposed 
would  not  suit  the  men  with  money.  The  offer  of 
$50,000  of  common  stock  might  not  appeal  to  them. 
Possibly  they  would  suggest  that  as  they  were  putting 
in  all  the  money  it  would  only  be  fair  that  this  money 
be  secured  in  some  way.  Perhaps  they  would  propose 
that  of  the  $50,000  of  stock  to  be  given  them  for  the 
money,  $25,000  be  made  a  six  per  cent,  cumulative 
preferred  stock,  payable  in  case  of  liquidation  of  the 
company  out  of  its  assets  before  anything  was  received 
by  the  common  stock. 

Such  a  demand  is  not  unreasonable.  The  preferred 
stock,  it  is  true,  would  receive  its  six  per  cent,  divi- 
dend out  of  profits  before  either  the  stock  of  the  in- 
ventor and  his  friend  or  the  common  stock  of  the 
investors    received    anything,    and    would    also    have 


ADAPTATION  OF  CORPORATE  FEATURES.    487 

preference  in  case  of  liquidation  of  the  company.  If, 
however,  the  owners  of  the  enterprise  felt  sure  of  the 
merits  and  success  of  their  invention  they  could  hardly 
object  to  this.  The  enterprise,  if  successful,  should 
not  only  pay  dividends  of  six  per  cent,  or  more  on 
all  the  stock,  but  accumulate  assets  in  addition  suffi- 
cient to  redeem  both  the  preferred  and  common  stock 
at  full  face  value  on  the  termination  of  the  company. 
The  inventor  and  his  friend  would,  therefore,  prob- 
ably accept  the  proposition. 

Two  questions  might  then  come  up, — first,  whether 
the  preferred  stock  should  participate  in  dividends  be- 
yond its  six  per  cent.,  and  second,  whether  it  should 
have  the  right  to  vote.  The  investors  would  probably, 
and  not  unreasonably,  insist  upon  both  these  points. 
Whether  they  should  be  allowed  would  be  purely  a 
matter  of  business  policy.  Probably  the  inventor  and 
his  friend  would  yield  in  both  matters,  as  the  investors 
would  not  really  have  a  full  half  interest  in  the  entire 
enterprise  unless  their  stock  did  have  these  two  addi- 
tional rights.  If  so,  all  the  investors'  stock,  both 
common  and  preferred,  would  vote  and  their  preferred 
stock — after  it  had  received  its  six  per  cent,  dividend 
and  all  the  common  stock  of  the  company  had  received 
a  like  amount — would  participate  in  any  further  divi- 
dends declared  in  that  year,  just  as  would  the  common 
stock.  It  is  to  be  noted  that  unless  expressly  provided 
otherwise — usually  in  the  charter  of  the  company — 
the  preferred  stock  would  have  these  rights  as  a  matter 
of  course. 

Frequently  investors  will  make  other  and  varying 
demands.     They  might  agree  to  the  general  proposi- 


488  FINANCING    AN    ENTERPRISE. 

tion  of  a  half  interest  for  the  money,  but  would  be 
almost  certain  to  demand  control  of  the  company.  If 
this  point  is  conceded  the  (Question  at  once  arises  as 
to  how  the  matter  may  best  be  arranged.  The  control 
usually  rests  with  the  majority  of  the  stock,  the  par- 
ties owning  or  controlling  such  majority  electing  the 
board  of  directors,  and  through  this  board  controlling 
the  company.  Either  then  the  majority  of  the  stock 
must  be  given  the  investors,  or  otherwise  the  usual 
voting  power  of  the  stock  must  be  limited  or  modified 
in  some  way.  The  end  desired  may  be  attained  by 
several  different  methods.  The  more  important  of 
these  follow.  The  term  inventor  as  used  therein 
designates  both  the  inventor  and  his  friend. 

( 1 )  By  giving  fifty-one  per  cent,  of  the  voting 
stock  to  the  investors,  the  inventor  retaining  but  forty- 
nine  per  cent.  This  is  the  plan  most  commonly  fol- 
lowed. The  investors  would  then  have  a  little  more 
than  half  the  stock  of  the  company  and  the  inventor 
a  little  less. 

(2)  By  an  equal  division  of  the  stock,  a  portion 
of  the  stock  issued  to  the  inventor  being  deprived  of 
the  voting  power.  This  is  effective,  but  in  some  states 
is  not  legally  permissible,  the  laws  prohibiting  the 
alienation  of  the  voting  right  from  common  stock. 

(3)  By  issuing  a  portion  of  the  inventor's  stock  as 
non-voting  preferred  stock.  The  laws  rarely  if  ever 
prohibit  the  issue  of  preferred  stock  without  the  voting 
right.  Hence  this  plan  may  be  carried  out  when  com- 
mon stock  could  not  be  issued  without  the  voting  right. 
In  this  case  perhaps  $10,000  of  the  face  value  of  the 
inventor's  stock  would  be  non-voting  participating  pre- 


ADAPTATION  OF  CORPORATE  FEATURES.    489 

ferred  stock  and  $40,000  would  be  as  before,  common 
stock  with  the  voting  right. 

(4)  The  stock  might  be  divided  equally  between 
the  two  parties,  but  a  board  of  directors  be  selected 
acceptable  to  the  investors  and  to  the  inventor  as  well, 
and  this  management  be  maintained  by  means  of  a 
voting  trust.  This  arrangement  is  effective  and  is 
discussed  later. 

(5)  The  stock  might  be  divided  equally  between 
the  two  parties,  but  be  so  classified  that  the  majority 
of  the  directors  would  be  elected  by  the  investors' 
stock.  This  plan  is  also  very  effective  and  is  discussed 
later. 

The  voting  trust  plan  already  referred  to  is  allow- 
able in  most  states  of  the  Union,  and  when  employed 
in  the  way  suggested  may  serve  a  double  purpose.  It 
insures  the  investors  control  of  the  company  by  giving 
them  a  majority  of  the  board  of  directors  and  at  the 
same  time  may  be  arranged  to  insure  representation 
on  this  board  to  the  inventor  and  his  friend,  or  speak- 
ing generally,  to  the  minority  interests.  Under  this 
arrangement  a  board  of  directors  would  be  agreed 
upon  between  the  parties.  At  this  stage  of  the  pro- 
ceeding all  parties  are  usually  friendly  and  a  board 
acceptable  to  all  of  them  could  probably  be  agreed 
upon  without  trouble.  If  the  board  consists  of  five 
members  the  investors  might  select  three  of  these 
directors  and  the  inventor  and  his  friend  tw^o,  the 
control  thereby  being  given  the  investors.  When  this 
is  done  the  "agreed"  board  would  be  elected  by  unani- 
mous vote  of  all  the  stock.  Then,  if  the  entire  stock 
of  the  company  or  even  a  majority  of  it  were  placed 


490  FINANCING   AN    ENTERPRISE. 

in  a  voting  trust  for  a  term  of  years  under  an  agree- 
ment that  its  full  vote  be  cast  for  the  designated  board 
of  directors,  that  board  would  be  elected  and  continued 
unfailingly  until  the  termination  of  the  trust.  Of 
course,  provision  must  be  made  for  deaths  or  resig- 
nations among  the  membership  of  the  board.  Such 
vacancies  might  be  filled  by  unanimous  vote  of  the 
remaining  members  of  the  board  or  by  agreement 
between  the  inventor  and  the  investors,  or  could  be 
provided  for  in  any  other  equitable  way.  The  main 
point  to  be  secured  is  the  maintenance  of  the  same, 
or  an  acceptable  management  for  the  term  of  the  vot- 
ing trust.  The  arrangement  is  effective  and  is  some- 
times very  desirable.  The  actual  stock  held  in  such 
a  voting  trust  is  in  the  hands  of  trustees  and  cannot 
be  sold  or  transferred  in  the  usual  way.  To  obviate 
this  difficulty,  negotiable  trustees'  receipts  or  certifi- 
cates are  usually  issued  to  represent  the  "tied-up" 
stock,  and  these  represent,  and  when  sold,  transfer 
the  equitable  ownership  of  the  stock.  At  the  termina- 
tion of  the  voting  trust  the  holders  of  these  trustees' 
receipts  exchange  them  for  certificates  of  stock  as  call- 
ed for  by  the  receipts. 

It  is  to  be  noted  that  an  ordinary  contract  or  agree- 
ment providing  that  stock  shall  be  voted  for  certain 
persons  or  in  a  certain  way,  is  not  sanctioned  by  law 
and  cannot  be  enforced  in  the  courts,  particularly  when 
the  stock  has  passed  from  the  hands  of  the  original 
holders.  The  voting  trust,  on  the  contrary,  is  allow- 
able under  the  laws  of  most  states  and  its  conditions 
may  be  enforced  by  legal  proceedings  if  necessary. 

The  control  of  the  company  by  the  investors,  and 


ADAPTATION  OF  CORPORATE  FEATURES,    49 1 

in  addition  minority  representation  on  the  board  may 
be  secured,  if  the  laws  permit,  even  more  satisfac- 
torily by  a  classification  of  the  stock.  Under  this 
arrangement  the  stock  may  be  divided  equally  between 
the  two  parties,  $50,000  to  the  investors  and  $50,000 
to  the  inventor  and  his  friend.  This  stock  is  then 
classified,  best  by  an  insertion  of  a  provision  to  that 
effect  in  the  charter  of  the  corporation  at  the  time  of 
organization.  The  $50,000  of  stock  belonging  to  the 
inventor  and  his  friend  might  be  classed  under  some 
convenient  designation,  as  "Class  A,"  and  be  given 
the  absolute  right  to  elect  a  certain  number  of  direc- 
tors— two  directors,  perhaps,  if  the  board  consists  of 
five  members.  The  $50,000  face  value  of  stock  be- 
longing to  the  investors  would  be  classed  under  some 
other  designation,  as  "Class  B,"  and  this  stock  would 
also  be  given  power  to  elect  a  certain  number  of  di- 
rectors— probably  three  if  the  board  consisted  of  five 
members.  Then  both  of  the  parties  hold  an  equal 
amount  of  stock  and  share  equally  in  the  profits  and 
property  of  the  corporation,  but  at  all  elections  the 
investors'  stock  elects  three  directors  and  the  inven- 
tor's stock  elects  but  two,  thereby  giving  the  control 
to  the  investors,  but  also  giving  due  representation 
on  the  board  to  the  inventor  and  his  friend. 

The  general  arrangement  of  classified  stock  is  an 
exceedingly  convenient  and  practical  one,  where  per- 
mitted by  the  laws  of  the  state,  and  may  be  varied 
to  meet  almost  any  desired  conditions  of  management. 

When  the  voting  trust  is  employed  or  stock  is  classi- 
fied, the  inventor  and  his  friend,  or  in  other  cases 
the  minority  interests,  are  insured  representation  on 


492  FINANCING    AN    ENTERPRISE. 

the  board.  This  representation  is  very  important  and 
is  perhaps  the  most  efficient  possible  means  of  pro- 
tecting the  interests  of  minority  stockholders.  This 
is  so  because  of  the  very  broad  powers  vested  in  the 
board  of  directors  and  the  conditions  which  govern 
the  board  and  its  action. 

The  board  of  directors  has  absolute  control  of  the 
affairs  of  the  company  and  unless  its  action  is  abso- 
lutely illegal  or  grossly  improper,  cannot  be  interfered 
with  by  the  stockholders.  Under  these  circumstances, 
if  the  investors  elected  the  entire  membership  of  the 
board  it  is  not  at  all  impossible  that  its  proceeding 
might  be  of  the  star  chamber  order  and  the  company 
be  managed  in  the  interests  of  the  investors  rather 
than  for  the  good  of  all,  and  this  without  any  positive- 
ly illegal  action  on  the  part  of  the  board.  It  therefore 
becomes  of  the  greatest  importance  for  the  minority 
interests,  or  in  the  present  case  the  inventor  and  his 
friend,  to  have  representation  on  the  board,  in  order 
to  know  what  is  being  done,  to  protest  against  im- 
proper action  or  to  secure  information  of  any  illegal 
action,  should  such  action  be  contemplated. 

If  the  inventor  and  his  friend  elected  one  or  more 
directors, the  investors  would  still  have  the  majority  of 
the  board,  and  would  therefore  still  control  its  action. 
The  inventor's  representatives  must,  however,  be  noti- 
fied of  all  board  meetings  and  would  have  a  right 
to  be  present,  and  they  would  therefore  be  able  to  act 
as  a  more  or  less  efficient  check  upon  improper  ma- 
jority action.  The  minority  could  not  in  any  way 
prevent  proper  action  of  the  majority,  but  if  anything 
wrong   was   attempted   the    inventor   and   his    friend, 


ADAPTATION  OF  CORPORATE  FEATURES.    493 

through  their  representatives,  would  have  immediate 
knowledge  of  the  proposed  action  and  could  either 
protest  against  it  or  resort  to  legal  proceedings  to  stop 
it  if  necessary.  In  practice  the  mere  presence  of  mi- 
nority representatives  on  the  board  tends  strongly  to 
prevent  attempted  action  injurious  to  the  interests  of 
this  minority. 

As  stated,  if  a  voting  trust  is  established  or  stock- 
is  classified,  board  representation  for  the  minority  may 
be  efifectually  secured.  If  neither  of  these  arrange- 
ments is  adopted,  some  other  provision  to  the  same 
end  is  very  desirable.  The  best  and  most  efficient  of 
these,  and  the  one  most  commonly  employed,  is  cumu- 
lative voting. 

Under  the  ordinary  system  of  voting,  every  share 
of  stock  may  cast  one  vote  for  each  director  to  be 
elected.  That  is,  if  five  directors  are  to  be  elected, 
every  share  may  cast  one  vote  for  each  of  five  candi- 
dates, and  this  is  the  only  way  its  full  vote  can  be 
cast.  Therefore  the  parties  holding  a  majority  of  all 
the  shares  of  a  corporation  can  elect  every  member 
of  the  board  of  directors,  and  in  the  case  under  con- 
sideration, if  the  investors  had  $50,000  face  value  of 
voting  stock  and  the  inventor  and  his  friend  had  but 
$40,000  face  value,  the  vote  of  these  latter  would  be 
absolutely  unavailing.  They  could  not  elect  a  single 
director  and  would  have  no  representation  on  the 
board. 

The  system  of  cumulative  voting  is  allowed  in  al- 
most every  state  of  the  Union.  Under  it  each  share 
of  stock  has  one  vote  for  each  director  to  be  elected 
as  before,  but  the  manner  in  which  these  votes  are 


494  FINANCING    AN    ENTERPRISE. 

to  be  cast  is  much  less  restricted.  They  may,  if  de- 
sired, be  cast  as  in  ordinary  voting,  one  for  each  can- 
didate up  to  the  full  number  of  directors  to  be  elected, 
or  may  all  be  cast  for  a  single  candidate,  or  they  may 
be  divided  among  the  candidates  in  any  way  desired. 
Under  this  arrangement  the  inventor  and  his  friend, 
holding  voting  stock  to  the  par  value  of  $40,000  or 
even  to  a  much  less  amount,  could,  if  they  stood 
together,  always  elect  one  or  more  members  of  the 
board. 

For  instance,  suppose  the  board  is  to  consist  of  five 
members.  Then  each  share  of  stock  is  entitled  to  five 
votes  at  elections  of  directors.  If  the  inventor  and  his 
friend  hold  $40,000  of  voting  stock,  they  would  have 
400  shares — shares  being  $100  each — and  therefore 
five  times  400,  or  2,000  votes,  at  their  disposal.  If  the 
other  parties  had  the  remaining  600  shares  they  would 
cast  3,000  votes,  and  under  the  ordinary  system  of 
voting  would  infallibly  elect  the  whole  board.  Un- 
der the  cumulative  system,  however,  the  inventor 
and  his  friend  being  able  to  "cumulate"  their  votes 
as  they  saw  fit,  might  put  two  candidates  in  nomina- 
tion and  divide  their  entire  vote  between  these  two, 
giving  each  1,000  votes.  There  is  then  no  possible 
way  in  which  the  other  parties  could  so  divide  their 
3,000  votes  as  to  defeat  the  inventor's  candidates. 
They  could  give  three  candidates  1,000  votes  each 
and  elect  these  three,  but  they  could  do  no  more.  If 
they  divided  their  3,000  votes  equally  among  four 
candidates,  each  would  receive  750  votes,  or  if  among 
five,  each  would  receive  600  votes,  which  in  either  case 
is  less  than  the  number  received  by  the  inventor's  can- 


ADAPTATION  OF  CORPORATE  FEATURES.    495 

didates.  As  a  matter  of  fact,  the  inventor  and  his 
associate  would  be  absolutely  sure  of  electing  their 
two  candidates — who  would  probably  and  properly  be 
themselves — so  long  as  they  acted  together. 

Occasionally  the  proposition  of  the  inventor  to  give 
$50,000  of  stock  for  $25,000  in  cash  will  be  met  with 
a  counter  proposition  from  the  investors  stipulating 
that  this  full  amount  of  stock  be  issued  as  preferred 
stock  with  the  voting  right.  If  this  preferred  stock 
is  limited  to  its  six  per  cent,  preferred  dividend,  the 
arrangement  would  be  a  very  good  one  for  the  inven- 
tor and  his  friend,  as  all  profits  earned  above  the  six 
per  cent,  paid  the  preferred  stock  would  then  belong 
to  them.  Probably,  however,  the  men  with  money 
would  demand  that  the  preferred  stock  participate 
fully  in  further  dividends.  This  demand  would  still 
not  be  severe.  If  the  invention  is  good,  profits 
should  be  earned  that  will  pay  far  more  than  the 
six  per  cent,  dividend  on  the  preferred  stock,  and  in 
such  event  the  mere  fact  that  the  preferred  stock  is 
entitled  to  the  first  "helping"  would  be  a  matter  of 
entire  indifTerence.  If  the  invention  is  not  good 
enough  to  do  this,  the  inventor  and  his  friend  ought 
to  be  even  more  willing  to  allow  the  investors  the 
advantage  of  the  preference,  as  the  failure  is  then  on 
the  inventor's  side. 

Sometimes,  however,  the  investors  will  propose  that 
they  receive  preferred  stock  to  the  amount  of  $50,000 
for  their  money,  and  in  addition  to  this  receive  a  bonus 
of  an  equal  amount  of  common  stock.  Usually  in  such 
case  the  investors'  offer  would  contemplate  a  non- 
participating,    non-voting    preferred    stock,    but    even 


496  FINANCING    AN    ENTERPRISE. 

then,  unless  the  conditions  of  the  enterprise  are  des- 
perate, the  inventor  had  better  refuse  the  proposition. 
It  is  unreasonable  and  excessive.  If  accepted  it  would 
necessitate  a  capitalization  of  $150,000  if  the  inventor 
and  his  friend  are  to  have  their  $50,000  of  common 
stock.  The  arrangement  would  then  mean  that  the 
investors,  in  case  the  enterprise  is  successful,  receive 
an  annual  interest  of  twelve  per  cent,  on  the  $25,000 
of  cash  actually  invested  by  them  as  long  as  the  pre- 
ferred stock  is  outstanding,  and  that  whenever  it  is 
retired  they  receive  back  twice  the  amount  of  money 
actually  put  in,  while  in  addition  to  all  this,  they 
participate  equally  in  any  further  profits  or  property 
of  the  enterprise  on  exactly  the  same  terms  as  the 
inventor  and  his  friend.  Obviously  the  conditions  are 
harsh. 

If  the  parties  putting  in  the  money  should  demand 
a  non-voting,  non-participating  preferred  stock,  or  per- 
haps bonds  to  the  amount  of  $25,000,  to  represent 
and  secure  the  actual  money  they  invest,  and  in  addi- 
tion $50,000  of  common  stock  as  a  bonus,  the  inventor 
retaining  an  equal  amount  of  common  stock,  the  terms 
are  again  severe,  but  perhaps  not  so  much  so  as  to 
justify  a  refusal.  Then  the  whole  transaction  is  prac- 
tically a  loan  of  the  money  to  the  enterprise,  secured 
by  the  preferred  stock  or  bonds.  On  this  loan  the 
investors  receive  dividends  or  interest  and  finally  re- 
ceive their  money  back.  Their  common  stock  repre- 
sents a  bonus  for  making  the  loan,  and  if  the  enter- 
prise is  a  fairly  good  one,  is  excessive.  Possibly  the 
investors  would  agree  to  a  smaller  proportion  of  com- 
mon  stock,   though,   unless   some   arrangement   were 


ADAPTATION  OF    CORPORATE  FEATURES.    497 

made  to  give  thcni  the  control,  this  is  not  probable, 
as  they  would  wish  a  sufficient  amount  of  voting  stock 
to  fully  protect  their  interests. 

It  is  to  be  noted  that  in  any  arrangement  of  this 
kind — which  may  be  modified  in  many  ways — an  issue 
of  preferred  stock  is  much  preferable  to  a  bond  issue. 
If  the  dividends  are  passed  on  preferred  stock — even 
though  cumulative — payment  cannot  be  forced  to  the 
injury  of  the  company,  but  the  deferred  dividends 
merely  pass  over  until  such  time  as  there  are  profits 
from  which  they  may  be  paid.  The  interest  on  bonds, 
on  the  contrary,  is  an  absolute  fixed  charge  which  must 
be  paid  when  due  under  penalty  of  foreclosure  of  the 
bonds.  That  is,  the  preferred  stock  receives  its  divi- 
dends if  profits  are  made ;  the  bonds  must  receive  their 
interest  without  regard  to  the  financial  condition  of 
the  company.  The  bonds  may  possibly  endanger  the 
very  existence  of  the  enterprise.  Preferred  stock  can- 
not. For  this  reason,  bonds  are  to  be  avoided  as  far 
as  possible  in  a  new  and  unproved  enterprise. 

Possibly  when  the  time  came  to  finance  the  enter- 
prise we  are  now  considering,  the  inventor's  original 
friend  might  be  so  favorably  impressed  with  the  in- 
vention that  instead  of  allowing  the  appeal  for  money 
to  be  made  to  outsiders  he  will  himself  put  in  the 
$25,000  of  cash  required.  Then  an  entirely  new  set 
of  conditions  arise.  Should  he  be  given  $50,000  of 
voting  stock  for  his  money,  and  also  receive  his  half 
of  the  reserved  stock,  amounting  to  $25,000,  he  would 
then  own  $75,000  of  the  stock,  or  three-fourths  of 
the  whole  company,  and  would  control  it  absolutely. 

Such  a  condition  would  probably  be  objectionable 


498  FINANCING    AN    ENTERPRISE. 

to  the  inventor.  He  might  be  willing  for  his  friend 
to  be  equal  to  him  in  the  management  or  perhaps 
even  consent  to  his  control,  but  would  not  relish  such 
a  preponderance.  The  emergency  might  be  met  by 
an  issue  of  non-voting  stock  for  the  money.  This 
stock  would  probably  be  a  preferred  stock  and  would 
usually  be  limited  strictly  to  its  preferential  dividend 
of 'six, per  cent.,  or  such  other  per  cent,  as  might  have 
been  agreed  upon.  Then  the  friend,  now  the  investor, 
would  receive  annual  dividends  of  six  per  cent,  on  his 
$50,000  of  preferred  stock — which  is  equivalent  to 
twelve  per  cent,  on  the  $25,000  actually  invested — be- 
fore the  inventor  received  anything.  Then  he  and  the 
inventor  would  participate  on  an  even  footing  in  the 
remaining  profits.  Both  would  be  equal  in  voting 
power  and  therefore  the  equality  of  management 
would  be  maintained. 

Possibly,  however,  the  inventor's  friend  would  in- 
sist on  receiving  the  full  $50,000  of  common  stock 
of  the  investment — which  would,  if  the  enterprise 
proves  good,  be  a  very  much  better  arrangement  for 
him — and  if  the  inventor  had  already  agreed  to  grant 
these  terms  to  strangers,  he  could  hardly  refuse  his 
friend.  At  the  same  time  he  might  very  properly  de- 
mand equal  power  in  the  management.  The  matter 
might  then  be  arranged,  as  already  discussed,  by 
means  of  the  voting  trust  or  perhaps  better  by  a 
classification  of  the  stock. 

If  the  board  is  composed  of  an  odd  number,  such 
as  three,  seven  or  thirteen,  as  is  usually  the  case,  each 
class  of  stock  might  be  given  the  power  to  elect  an 
equal  number  of  directors,  leaving  the  one  odd  mem- 


ADAPTATION  OF  CORPORATE  FEATURES.    499 

ber  to  be  elected  in  some  other  way.  For  instance, 
if  the  board  were  composed  of  five  members  and  there 
were  two  classes  of  stock,  each  class  might  be  given 
power  to  elect  two  directors.  This  would  provide  for 
four  of  the  directors,  and  the  election  of  the  remaining 
director  might  perhaps  be  effected  by  agreement  be- 
tween the  two  groups.  Should  a  tie  result,  the  fifth 
director  would  fail  of  election  and  then,  as  the  board 
of  directors  is  usually  empowered  to  fill  vacancies, 
the  matter  would  probably  be  left  to  the  board  itself. 
Presumably  the  four  members  would  be  able  to  agree 
on  some  fifth  member.  If  not,  the  board  must  act 
with  four  members  instead  of  five.  If,  however,  the 
fifth  director  were  once  elected  and  the  by-laws  pro- 
vided, as  is  usually  the  case,  that  a  director  once 
elected  holds  his  office  until  the  election  of  his  suc- 
cessor, the  fifth  director  would,  in  case  of  a  tie  at  any 
subsequent  election,  hold  over  and  the  board  would 
then  be  complete,  though  but  four  new  members  were 
elected. 

It  is  sometimes  necessary  in  making  the  corporate 
arrangements  and  adjustments  to  issue  bonds  with 
some  special  rights.  A  bond  issue  will  occasionally 
be  made  participating — that  is,  profit-sharing.  In  this 
case  the  bonds  first  receive  their  regular  interest  and 
then  in  addition  receive  dividends  from  profits.  The 
arrangement  is  not  common,  but  where  it  does  exist 
usually  provides  that  the  bonds  after  receiving  their 
annual  interest,  shall  then  participate  on  the  same  basis 
as  does  the  stock  of  the  company  in  any  dividends  de- 
clared. It  would  seem  to  be  more  equitable  that  the 
stock  should  receive  a  dividend  equal  to  the  interest  of 


500  FINANCING    AN    ENTERPRISE. 

the  bonds  before  these  latter  begin  their  participation 
in  profits. 

Another  provision  not  uncommon  and  intended  to 
provide  some  additional  protection  to  preferred  stock, 
is  an  arrangement  that  in  case  preferred  dividends  are 
not  paid  for  a  certain  period,  or  if  they  fall  in  arrears 
to  some  specified  amount,  then  such  preferred  stock 
shall  have  the  right  to  vote.  Usually  in  such  cases 
this  voting  right,  when  effective,  places  the  control  of 
the  company  in  the  hands  of  the  preferred  stockholders. 
Or  sometimes  it  is  provided  without  reference  to  vot- 
ing rights  that  the  control  of  the  company  shall  pass 
to  the  preferred  stockholders  in  case  of  failure  of  divi- 
dends for  a  specified  period  or  to  a  prescribed  amount. 
The  arrangement  is  a  very  fair  one.  If  the  common 
stock  in  which  the  management  rests  cannot  direct  the 
company  successfully,  it  is  but  fair  that  it  should  step 
aside  and  give  the  preferred  stock  an  opportunity  to 
not  only  protect  its  own  interests  but  benefit  the  com- 
mon stock  as  well  by  a  better  administration. 

Very  occasionally  it  will  be  provided  that  preferred 
stock  after  payment  of  its  dividend,  shall  receive  a 
certain  proportion  of  all  profits  each  year  until  its 
face  value  has  been  paid  in  full.  The  stock  is  then 
cancelled  and  is  practically  non-existent.  Usually 
when  such  an  arrangement  is  made  preferred  stock  is 
issued  to  the  full  amount  of  the  money  invested  and 
in  addition  a  bonus  of  common  stock  is  given  to  the 
investors.  Tn  this  case  the  investors  receive  back  their 
money  from  the  profits  of  the  enterprise  and  then — 
all  parties  being  "on  velvet" — participate  equally,  or 
in  accordance  with  their  stock  holdings,  with  the 
owners  of  the  enterprise  in  any  further  profits. 


ADAPTATION  OF  CORPORATE  FEATURES.    5OI 

Practically  this  same  arrangement  is  at  times  car- 
ried out  by  the  money  being  advanced  as  a  loan,  to  be 
repaid  as  agreed,  and  the  party  making  the  loan  re- 
ceiving a  substantial  bonus  of  stock  for  the  "accom- 
modation." When  this  plan  is  adopted,  care  should 
be  exercised  that  the  laws  against  usury  are  not 
violated. 

In  all  the  various  modifications  of  the  corporate 
arrangements  discussed,  it  must  be  borne  in  mind  that 
any  stock  not  full  paid — either  technically  or  actually 
— subjects  the  party  to  whom  it  is  issued  to  a  liability 
for  the  unpaid  balance  as  long  as  he  holds  such  stock. 
This  unpaid  amount  may  be  claimed  by  the  corpora- 
tion— unless  barred  by  an  express  waiver  of  such  claim 
— or  by  any  creditor  of  the  corporation.  Usually  this 
liability  does  not  follow  the  stock  into  other  hands 
but  is  extinguished  when  the  original  owner  parts 
with  the  stock. 

The  full  payment  of  stock  demands  more  care  than 
is  usually  exercised.  If  any  colorable  quid  pro  quo 
is  given  in  exchange  when  stock  is  issued,  such  as  an 
invention,  a  mine,  a  business  or  other  property  of  real 
present  or  prospective  value  turned  into  the  corpora- 
tion, the  courts  will  usually  hold  the  stock  to  be  full 
paid.  In  many  cases,  however,  the  property  exchanged 
in  order  to  make  the  stock  full  paid  is  so  utterly 
inadequate  that  the  transaction  will  not  stand  the 
scrutiny  of  the  courts.  Under  such  circumstances, 
should  the  company  become  insolvent,  the  creditors 
might  collect  the  entire  amount  needed  to  make  this 
stock  actually  full-paid,  provided  only  that  the  stock 
is  still  in  the  hands  of  the  parties  to  whom  it  was  first 


502  FINANCING   AN    ENTERPRISE. 

issued,  or  if  in  the  hands  of  others,  that  the  certificates 
are  not  marked  "  full-paid." 

It  is  but  seldom  this  point  arises,  but  it  may  be  so 
serious  when  it  does  that  parties  receiving  stock  direct 
from  the  issuing  corporation  should  be  quite  sure  that 
it  has  been  fully  paid  before  taking  it  in  their  own 
names.  If  their  stock  is  purchased  from  other  parties 
and  the  certificates  are  marked  full-paid,  they  may 
take  the  stock  with  full  confidence,  for  no  liability 
could  then  follow  it,  no  matter  what  price  was  paid 
either  by  the  original  or  by  the  present  purchasers.  If, 
however,  their  stock  is  purchased  at  less  than  its  par 
value  and  comes  direct  from  the  company,  or  the  cer- 
tificates are  not  marked  full-paid,  its  condition  re- 
quires investigation.  Otherwise  there  is  always  a  pos- 
sibility of  unexpected  and  unwelcome  liabilities  arising 
later. 


APPENDIX. 


CHAPTER  XLII 
THE  INVESTOR'S  QUESTIONS. 


The  following  questions  were  originally  prepared 
to  assist  in  the  investigation  of  enterprises  from  the 
standpoint  of  the  investor.  They  cover  broadly  the 
important  points  upon  which  the  investor  must  have 
information,  or  should  have  information  if  he  is  to 
judge  intelligently  of  an  offering.  As  these  same 
points  must  be  considered  with  equal  care  by  the 
parties  who  make  the  offering,  the  questions  are  given 
here  for  use  in  the  preparation  of  prospectuses  and  in 
the  make-up  of  the  general  presentation. 

Many  of  these  requirements  of  the  investor  have 
already  been  considered  in  the  present  work,  but  the 
condensed  presentation  which  follows  supplies  the  mat- 
ter in  a  more  accessible  and  more  available  form  for 
the  present  use  than  that  of  the  text. 

These  questions  are  comprehensive.  They  are  sup- 
posed to  cover  broadly  all  those  points  in  any  incor- 
porated enterprise  upon  which  the  investor  has  a  right 
to  be  informed.  In  any  particular  enterprise  it  is 
probable  that  they  will  be  but  partially  applicable. 
Some  will  be  obvious  and  some  unnecessary.  In  any 
case,  however,  when  drawing  up  a  prospectus  or  in 
preparing  the  facts  for  a  general  presentation,  the 
questions  may  be  used  to  advantage.     Those  that  are 

503 


504  FINANCING    AN    ENTERPRISE. 

not  available  may  be  ignored.  Those  that  do  apply 
will  be  considered  and  the  information  they  call  for 
will  be  given  in  full  or  in  part,  or  omitted  entirely  as 
may  seem  best  to  those  in  charge.  If  the  information 
required  by  these  questions,  as  far  as  they  may  apply, 
is  incorporated  in  a  presentation,  together  with  any 
features  peculiar  to  the  particular  enterprise,  it  can 
hardly  be  doubted  that  the  presentation  will  at  least 
be  reasonably  complete. 

I.  Nature  of  Enterprise. 

1.  Is  the  basis  of  the  enterprise  sound? 

2.  Is  the  business  or  undertaking  profitable  else- 

where ? 

3.  What  competition  or  opposition  will  be  met? 

4.  What  peculiar  advantages  does  it  enjoy  over 

these  others? 

5.  Can  it  be  conducted  profitably  under  existing 

conditions? 

II.  Plan  of  Organization. 

1.  In  what  state  organized? 

2.  What  is  the  capitalization? 

3.  Is  the  capitalization  reasonable? 

4.  Has  the  stock  been  issued  in  whole  or  in  part 

and  if  so,  for  what? 

5.  Is  the  stock  offered  for  sale  full-paid  and  non- 

assessable? 

6.  Has  any  of  the  stock  preferences? 

7.  Is  any  stock  unissued  or  held  in  the  treasury? 

8.  Who  hns  stock  control? 


Tiiii  investor's  questions.  505 

9.     Are  the  rights  of  smaller  stockholders  protected? 
10.     Are  there  any  unusual   features  in  charter  or 
by-laws  ? 

III.     Present  Condition  of  Enterprise. 

As  to  Property. 

1.  What  properties  or  rights  are  controlled? 

2.  What  is  their  value  and  how  estimated? 

3.  Are  these  properties  or  rights  owned,  or  held 

under  lease,  license,  grant,  option  or  other- 
wise ? 

4.  If  owned,  are  titles  perfect? 

5.  Are  there  any  incumbrances  on  the  properties 

or  rights? 

6.  If  not  owned,   are  the  holding  papers   in  due 

form? 

7.  If  not  owned,  are  the  terms  of  holding  reason- 

able, satisfactory  and  safe? 

8.  In  event  of  liquidation,  what  would  be  worth 

of  property? 

As  to  Operation. 

1.  What  operations  have  been  or  are  now  carried 

on? 

2.  What  have  been  the  results? 

3.  What  difficulties  if  any  have  been  encountered? 

4.  What  is  demand  for  the  product  or  operation 

of  the  enterprise? 

5.  What  is  present  status  of  the  enterprise? 

6.  Are  proper  books  kept? 


5o6  FINANCING   AN    ENTERPRISE. 

As  to  Finance. 

1.  What  are  the  present  assets  and  their  actual 

value? 

2.  What   debts,    claims,    fees,    rents,   royalties   or 

other  payments  or  obligations  are  now  due 
or  are  to  be  met  and  carried? 

3.  From  what  resources  are  these  to  be  met? 

4.  Who  handles  the  moneys  and  under  what  safe- 

guards ? 

5.  What  are  or  will  be  the  running  expenses,  sal- 

aries, etc.  ? 

IV.     Management. 

Directors. 

1.  How  many  members  in  the  board? 

2.  Who  are  these  members? 

3.  What  is  their  past  record  and  present  business 

status  ? 

4.  Who  are  the  active  members  of  the  board? 

5.  Who  if  any  are  inactive? 

6.  Are  meetings  regularly  held  and  attended? 

7.  Who  compose  the  executive  committee — if  any 

— and  what  are  its  powers? 

8.  Are  the  directors  stockholders,  and,  if  so,  to  a 

material  amount  ? 

Officers. 

1.  Who  are  the  officers? 

2.  What  are  their  previous  records? 


THE   investor's   QUESTIONS.  5^7 

3.  What  are  their  special  present  quahfications? 

4.  Are  they  able  to  work  together  without  friction? 

5.  What  compensation  do  they  receive  or  are  they 

to  receive? 

6.  Are   they   interested   in   the   enterprise   beyond 

their  salaries? 


V.  Plan  of  Operation. 

1.  What  is  the  general  plan  of  operation? 

2.  What  special  reasons  if  any  led  to  its  adoption? 

VI.  Disposition  of  Money  Asked  For. 

1.  Does  the  money  from  sale  of  stock  go  into  the 

treasury  of  the  company? 

2.  If  any  does  not  go  into  the  treasury,  to  whom 

does  it  go  and  for  what  purpose? 

3.  Of  money  going  into  the  treasury,  what  pro- 

portion goes  into  active  development  and  op- 
eration ? 

4.  What  part  goes  to  pay  off  existing  debts,  obli- 

gations and  claims? 

5.  What  part,  if  any,  goes  to  pay  for  promotion 

expenses,  commissions,  etc.  ? 

6.  How  is  the  development  and  operating  money 

to  be  applied? 

7.  Is  the  amount  asked  for  sufficient  to  accomplish 

the  desired  results? 

8.  Will  it  place  the  company  on  a  self-supporting 

or  profitable  basis? 


508  FINANCING    AN    ENTERPRISE. 

VII.  The  Proposition. 

1.  Is  the  general  proposition  a  fair  one? 

2.  Is  the  price  of  stock  or  bonds  reasonable? 

3.  How  do  these  prices  compare  with  any  former 

prices? 

4.  If  common  stock  is  offered,  do  preferred  stock, 

bonds  or  other  profit-sharing  obligations  take 
precedence  and  to  what  amount? 

5.  What  reserve  of  profits  will  be  retained  before 

dividends  are  to  be  declared? 

6.  If  preferred  stock  is  offered,  is  it  cumulative, 

does  it  vote,  when  is  it  redeemable  and  at 
what  price,  what  sinking  fund  provision  is 
made  for  redemption  and  are  any  peculiar 
1  provisions  attached  ?  Do  any  bonds  or  other 
obligations  take  precedence  of  the  preferred 
stock  ? 

7.  If  bonds  are  offered,  what  interest  is  paid,  and 

when  and  where;  upon  what  property  are 
they  secured  and  when  and  how  are  they  paid  ; 
is  the  trustee  or  trust  company  of  repute ; 
under  what  conditions  are  the  bonds  fore- 
closable ;  when  and  how  are  they  or  may  they 
be  redeemed ;  are  there  any  other  securities 
taking  precedence,  and  are  there  any  peculiar 
provisions  in  deed  of  trust? 

VIII.  General. 

T.  What  is  the  previous  history  of  the  enterprise  or 
the  property  or  undertaking  on  which  it  is 
based  ? 


THE   investor's   QUESTIONS.  5O9 

If  inventions  enter  prominently,  what  is  the 
previous  record  of  the  inventor? 

By  whom  are  the  statements  made  and  is  the 
party  making  them  reHable? 

Are  there  any  contracts  or  obhgations  not  now 
effective  by  which  the  enterprise  will  subse- 
quently be  affected? 


INDEX. 


A. 


Adaptation  of  Corporate  l-'catures  (Ch.  XLI),  484-502. 
Flexibility  of  Corporate  System,  484. 

Case  in  Point,  484-499. 
Inventor's  Arrangements,  484-499. 
Close  Corporations,  485. 
Enlarging  Corporation,  485-489. 
Preferred  Stock,  486-487. 
Question  of  Control,  488-489. 

Methods  of  Meeting  Question,  488-489. 
Voting  Trusts,  489,  490. 
Classified  Stock,  491. 
Protection  of  Minority,  492-495. 
Varying  Stock  Plans,  495-499. 
Bond  Issues,  499,  500. 

Sundry  Corporate  Modifications,  500,  501. 
Full  Paid  Stock,  501,  502. 
Advantage  of  Efficient  Management,  34-40. 
Advantage  of  High  Capitalization,  223,  224. 
Advertising,  341-343.     (See  Chapters  XXXII-XXXIV.) 
Agreement  for  Promotion,  465,  468-472. 
APPENDIX,  503-509. 
Attorney,  Necessity  for,  121,  122,  474-483. 

B. 

Bond  Issues,  499,  500. 

Bonuses,  472,  473. 

Bonuses    and    Commissions,    462-473.     (See    Commissions       and 

Bonuses.) 
Borrowing  Money,  22-24. 


Capital  and  Undertaking,  Relations  of,  42-45. 
Dominance  of,  44-47. 
Necessity  of  Sufficient,  31-34. 


511 


512 


INDEX. 


Capitalization  and  Value,  176—182. 

of  New  Enterprise,  191-206. 
Capitalization  Based  on  Present  Values  (Ch.  XIX),  191-206. 
New  Enterprises,  191,  192. 

Stock  for  Salaries,  191,  192. 
Capitalization  of  Going  Concern,  193-196. 
Promoter's  Profit,  193,  194. 
Working  Capital,  194,  195. 
Provision  for  Future  Needs,  195. 
Cases  in  Point,  196-206. 

Marble  Quarry,  196-199. 
Improvement  in  Cameras,  199-202. 
Invention,  202,  203. 
Coal  Mine,  203,  204. 
Contract,  204-206. 
Capitalization  Based  on  Present  Values  (Ch.  XX),  207-221. 
Going  Concerns,  Good-will,  207-221. 
Definition  of  Good-will,  207. 
Personal  Good-will,  208-210. 

Professional  Good-will,  209,  210. 
Good-will  Carried  by  Trade-Names,  210-213. 
Pond's  Extract,  210. 
Sapolio,  211,  212. 
Intangibility  of  Good-will,  213. 
Capitalization  of  Good-will,  213-221. 
Partnership,  214-216. 

Objection  to  Under-capitalization,  215,  216. 
Hardware  Business,  216-217. 
Use  of  Preferred  Stock  to  Represent  Actual  Values, 

217-220. 
Mail  Order  Business,  218,  219. 
United  States  Steel  Corp.,  219,  220. 
Common  Stock  to  Represent  Good-will,  218-221. 
General  Rule  as  to  Stock  Representing  Good-will,  220, 

221. 
Capitalization  Based  on  Profit  Possibilities  (Ch.  XXII),  233-240. 
Purely  Speculative  Enterprises,  233-240. 
Mining  Schemes,  234-237. 
Typical  Cases,  234-236. 
Public  Impression,  236,  237. 
New  Inventions,  237-240. 

Marconi  Wireless  Telegraph  Co.,  237,  238. 


INDEX.  513 

Capitalization  Based  on  Profit  Possibilities. — Continued. 
New  Inventions. — Continued. 
Liquid  Air  Co.,  238-240. 

Proper  Capitalization,  240. 
Capitalization  Based  on  Profit  Probabilities  (Ch.  XXI),  222-232. 
Profit  Probabilities  Compared  with  Good-will,  222. 
Capitalization  of  Probable  Profits,  222-232. 
Coal  Mine,  222,  223. 
Advantage  of  High  Capitalization,  224. 
Dredging  Contract,  224,  225. 
Capitalizing  Inventions,  225-227. 

New  Sewing  Machine,  226,  227. 
Capitalizing  Franchises,  227-232. 
Union  Traction  Co.,  228,  229. 
Gas  Franchise,  229-231. 
Watering  Stocks,  231,  232. 
Capitalization.     Legal  Status.     Functions.     (Ch.  XVI),  163-173. 
Definition,  163. 
Legal  Limitations,  164-166. 

How  Avoided,  166. 
Functions  of  Capitalization,  166-173. 
To  Apportion  Interests,  166-1 7 L 
To  measure  Values,  167,  169-172. 
Capitalization  of  a  Partnership,  167-169. 
an  Invention,  170-172. 
Shares  without  Valuation,  172,  173. 
Capitalization  Not  Based  on  Value  (Ch.  XVIII),  184-190. 
Incorporation  of  Inchoate  Enterprise,  184. 
Preliminary  Incorporation,  184-186. 
Close  Corporations,  186-188. 
Case  in  Point,  186-188. 
Over-Capitalization  to  Keep  Down  Dividends,  188,  189. 
for  Business  Reasons,  189,  190. 
CAPITALIZATION  OF  AN  ENTERPRISE  (Part  IV),  163-252. 
Commissions  and  Bonuses  (Ch.  XXXIX),  462-473. 
Parties  Entitled  to  Commissions,  462-466. 
Commissions  for  Direct  Sales,  462,  463. 

for  Sale  of  Stock  or  Securities,  463. 
for  Interesting  Others,  463,  464. 
for  Introductions,  464-466. 
Justification  of,  465. 
Agreement  for,  466. 
Rates  of  Commission,  466,  467. 


514  INDEX. 

Commissions  and  Bonuses. — Continued. 

Plan  of  Giving  Flat  Prices,  467,  468. 
Preparing  Commission  Agreement,  468-472. 
Specific  Points  to  be  Covered,  469-472. 
Bonuses,  472-473. 

When  Given,  472,  473. 
Conditions  of  Financing  (Ch.  II),  8-13. 

Ideal  Conditions  for  Financing,  9,  13. 
Usual  Conditions,  9,  10. 

Misrepresentation,  10. 
Investors'  Standpoint,  10-12. 
Essentials  for  Successful  Promotion,  12,  13. 
Abnormal  Successes,  12,  13. 
Control  of  Corporations,  488-495. 
Copyrights,  140,  141. 
Corporate  Features,  Adaptation  of,  484-502.     (See  Adaptation  of 

Corporate  Features.) 
Corporate  Control,  488-495. 
Corporation,  Close,  186-188,  485. 


Development,  Personal,  14-22. 

Mary  Elizabeth  Candy  Shops,  16-19. 

E. 

Edison,  Town  of,  116,  117. 
Enterprises,  Expert  Investigation  of,  75-77. 
General  Investigation  of,  66-74. 
Non-Speculative,  Investigation  of,  75-92. 
Presentation  of,  253-264. 
Private  Presentation  of,  303-359. 
Speculative,  Investigation  of,  93-^108. 
ENTERPRISE,  THE  (Part  I),  5-47. 
Environment,  Investigation  of,  63-65. 
Essentials  of  Success,  12,  13,  27-40,  41. 
Efficient  Management,  34-42. 
Sound  Undertaking,  27-31. 
Sufficient  Capital,  31-34. 
Excessive  Capitalization  (Ch.  XXIII),  241-252. 
Effects  of  Over-Capitalization,  241,  242. 
Over-Capitalization,  What  it  is,  242. 


INDEX.  515 

Excessive  Capitalization. — Continued 

Over-Capitalization,  What  it  is. — Continued. 

Causes  of,  242,  243. 

Illustration,  Royal  Diamond  Company,  243,  244. 
Inventors,  246,  247. 
Promoters,  247-252. 

Cases  in  Point,  248-252. 
Experimental  Work  and  Model-Making  (Ch.  XI),  109-117. 
Cost  of,  109-113. 
Cautions  Relating  to,  110-116. 
Typewriters,  113. 
Typesetting  Machines,  113. 
Printing  Press,  114,  115. 
Edison,  Town,  of,  116,  117. 


Failure  to  Investigate,  49-58. 

Cases  in  Point,  50-58. 
Financiers.     (See  Promoters  and  Financiers.) 
Financing,  Conditions  of,  8-13. 
Methods  of,  14-26. 
F"unctions  of  Capitalization,  166,  167. 

Apportionment  of  Interests,  166-171. 

Measurement  of  Values,  171-173. 
Fundamental  Patents,  126,  127. 


Going  Concerns,  207-221. 

Capitalization  of,  193-196. 
Compared  with  Profit  Probabilities,  222. 
Good-will,  207-221.      (See  Capitalization  Based  on  Present  Values, 

Ch.  XX.) 
Go(jdwin  Film  Case,  130. 

Guaranteed  Stock,  Bonds  and  Dividends  (Ch.  XXXVI),  414-429. 
Term  "Guaranteed  Stock"  as  used  in  Promotion,  414-417. 
Method  of  Guaranteeing  Stocks,  415-420. 

Where  the  Payment  comes  from,  417,  418. 
Usual  Representations,  418,  419. 
Real  Nature  of  Transaction,  420-422. 
Fallacy  Involved,  421,  422. 
Objections  to  Plan,  422,  423. 


5l6  INDEX. 

Guaranteed  Stock,  Bonds  and  Dividends. — Continued. 

Cost  of  Guarantee,  423,  424. 

Guaranteeing  the  Guarantee,  425. 

Guaranteeing  by  Insurance  Policies,  425. 

Guaranteeing  First  Interest  on  Bonds,  425,  426. 

Guaranteeing  First  Dividends,  427,  428. 

Conclusion,  429. 
Guarantees,  Trust  Fund,  404-413.     (See  Trust  Fund  Guarantees.) 


Importance  of  Investigation  (Ch.  VI),  48-58. 
Potential  Enterprises,  48. 

Investigation,  Necessity  for,  49-53. 
Cases  in  Point,  50-53. 
Refusal  to  Investigate,  53,  54. 
Failure  to  Investigate,  54-58. 
Cases  in  Point,  55-58. 
Incorporation,  26,  184-188.     (See  Chapters  XLI,  XLII.) 
Introductory  (Ch.  I),  5-7. 

Enterprises  Defined,  5. 
Requisites  for  Financing,  5,  6. 
Untried  and  Fraudulent  Enterprises,  6. 
Methods  of  Financing,  6,  7. 
Inventions.     (See  Chapters  X-XII.) 

Capitalization  of,  169-172,  225-227,  237-240. 
Investigation  of,  68-74,  77-81,  96-108. 
Over-Capitalization  of,  246,  247. 
Patentability,  106,  107. 
Inventor's  Arrangements,  484-499. 

Characteristics,  97. 
Investigation,  Necessity  of,  28,  29,  49-58. 

Refustil  to  Permit,  53,  54. 
Investigation  of  a  Non-Speculative  Enterprise  (Ch.  IX),  75-92. 
Expert  Investigation,  75-77. 
Cases  in  Point,  77-91. 

Synthetic  Copper,  77-81. 
Asphalt  Deposit,  81-88. 
Clay  Deposit,  89-92. 
Investigation  of  a  Speculative  Enterprise  (Ch.  X),  93-108. 
Mines  and  Inventions,  93,  94. 
Cases  in  Point,  94-101. 


INDEX.  517 

Investigation  of  a  Speculativo  lintcrprisc. — -("ontiniied. 
Mines  and  Inventions. — Continued. 
Cases  in  Point. — Continued. 
Bell  Telephone,  94,  9.S. 
Edison  Phonograph,  95,  96. 
Brick  Machine,  97-101. 
Inventors,  Characteristics  of,  97. 
Testing  Value  of  Inventions,  102-108. 
Demand,  103,  104. 
Efficiency,  104,  105. 
Patentability,  106,  107,  108. 
Value,  108. 
INVESTIGATION    OF    AX    ENTERPRISE    (Part    II),   48-117. 
Investigation  of  Natural  Features  of  Enterprise,  60-65. 
Basis  of  Enterprise,  61. 
Conditions  of  Operation,  65. 
Environment,  63,  64. 
Output,  62,  63. 
Title,  61,  62. 
Investor's  Questions  (Ch.  XLII),  503-509. 
Requirements  of  the  Investor,  503. 

Their  Application,  503,  504. 
Nature  of  Enterprise,  504. 
Plan  of  Organization,  504,  505. 
Present  Condition  of  Enterprise,  505,  506. 
Management,  506,  507. 
Plan  of  Operation,  507. 
Disposition  of  Money  Asked,  507. 
The  Proposition,  508. 
General,  508,  509. 
Investors,  Standpoint  of,  10-12. 

L. 
Large  vs.  Small  Investors,  303-307. 
Legal  Assistance  (Ch.  XL),  474-483. 
When  Necessary,  474-476. 
Disadvantages  of  Dispensing  with  Lawyer,  474-479. 

Cases  in  Point,  477,  478. 
Selecting  a  Lawyer,  480,  481. 
Question  of  Fees,  481,  482. 
Cautions,  482,  483. 
Legal  Limitations  on  Capitalization,  164-166. 


5l8  INDEX. 

Legal  Status  of  Capitalization,  164-166. 
Legitimate  Monopolies,  161-162. 

Artificial,  161,  162. 

Natural,  161,  162. 

M. 

Management,  Efficient,  34-40,  506,  507. 

Importance  of,  in  Undertaking,  41,  42. 
Manager,  Securing,  35-40. 

Manner  and  Matter  of  Presentation  (Ch.  XXIV),  253-264. 
Necessity  for  Favorable  Presentation,  253,  254. 
Distinction  between  Facts  and  Expectations,  254,  255. 
Artistic  Presentation  of  Facts,  255. 
Large  vs.  Small  Investors,  256,  257. 
Promoters'  Profits,  258-264. 
Legal  Aspect,  258-262. 

Secret  Profits,  Methods  of  Securing,  262-264. 
Mary  Elizabeth  Candy  Shops,  16-19. 
Methods  and  Results  of  Investigation  (Ch.  VII),  59-65. 
Primary  Object  of  Investigation,  59,  60. 
Investigation  of  Natural  Features,  60-65. 
Basis  of  Enterprise,  61. 
Title,  61,  62. 
Output,  62,  63. 
Environment,  63,  64. 
Conditions  of  Operation,  65. 
Methods  of  Financing  (Ch.  Ill), 14-26. 
Personal  Investment,  14. 
Pcr-sonal  Development,  14-20. 

Modifications  of,  21-22. 
Borrowing  Money,  22—24. 
Partnership,  24-26. 
Incorporation,  26. 
Mining  Enterprises,  Capitalization  of,  234-237. 
Investigation  of,  81-88,  94. 
Minority,  Protection  of,  492-495. 
Model-Making,  Cautions  Relating  to,  110-116. 

Cost  of,  109-113. 
Monopolies  (Ch.  XV),  149-162. 

Obtaining  a  Monopoly,  149-162. 

In  Standard  Lines  of  Business,  150-153. 


INDEX.  519 

Monopolies. — Continued. 

Obtaining  a  Alonoply. — Continued. 
In  Natural  Products,  153-162. 

Kimbcrly  Diamond  Mines,  153-155. 
Trinidad  Asphalt  Lake,  155-159. 
Standard  Oil  Company,  159-161. 
Legitimate  Monopolies,  161,  162. 

Artificial,  161,  162. 
Natural,  161,  162. 

P. 

Partnership,  25. 

Capitalization  of,  167-169. 
Patents  (Ch.  XII),  118-130. 
Nature  of,  119,  120. 
Securing  Patents,  120-129. 

Necessity  for  Attorney,  121,  122. 
Fees  of,  122. 
Character  of,  123,  124. 
Preliminary  Search,  125. 
Fundamental  Patents,  126,  127. 
Multitudinous  and  Blanket  Claims,  126,  127. 
Government  Fees,  127,  128. 
Improvements,  128. 
Goodwin  Film  Case,  130. 
Patents,  Presentation  of,  299-301 . 

vs.  Secret  Processes,  143-148. 

Preparation  for  Presentation  (Ch.  XXV),  265-277. 

Inadequate  Preparation,  265,266. 

Adequate  Preparation,  266-276. 

Cases  in  Point,  267-276. 

Improvement  in  Typewriters,  267-272. 
Mines,  Quarries,  etc..  274,  275. 
Proper  Stage  for  Presentation,  270-272. 

Passing  this  Stage,  271,  272. 
Over-preparation,  275. 
Fraudulent  Preparation,  276,  277. 
PRESENTATION    OF   AN    ENTERPRISE    (Part   V),    253-403. 
Presentation,  The  (Private  or  Public),  (Ch.  XXVIII),  303-313. 

Comparison  of  Private  and  Public  Presentations,  303-310. 
Advantages  of  Private  Presentation,  304. 
Objections  to  "  "  304,305. 


520  INDEX. 

Presentation,  The  (Private  or  Public). — Continued. 

Comparison  of  Private  and  Public  Presentation. — 

Continued. 
Advantages  of  Public  Presentation,  305-307. 
Objections  to         "  "  307. 

Presentation  of  Speculative  Enterprises,  307-310. 
Fraudulent  Presentations,  311-313. 
Cases  in  Point,  311,  312. 
Effect.  313. 
Private  Presentation  (Among  Friends),  (Ch.  XXIX).  314-328. 
Presentation  to  Friends,  314. 
Cautions,  314-316. 
Instances  in  Point,  316-318. 
Repute  of  Promoter,  318. 
Methods,  319-328. 

Cases  in  Point,  321-327. 
Sanitarium,  321. 
Asphalt  Deposit,  324,  325. 
Co-operative  Idea,  326. 
Promoter's  Profits,  327,  328. 
Private  Presentation  (Among  Strangers),  (Ch.  XXX),  329-340. 
Reasons  for  Approaching  Strangers,  329-331. 
Methods  of  "  "  332-337. 

Application  by  Letter,  332-334. 
"  in  Person,  334-338. 

Expenses,  335-338. 
Personal  Repute,  338. 
Financing  Enterprises  in  Great  Cities,  338-340. 
Difficulties,  339. 

Letters  of  Introduction,  339,  340. 
Private  Presentation  (Among  Strangers-Continued),  (Chapter 

XXXI),  341-359. 
Position  of  Stranger  in  New  York,  341. 
Advertising  for  Capital,  341,  342. 
Advertisers  Offering  to  Secure  Capital,  342,  343. 

Methods  of  Such,  342,  343. 
Direct  Approach,  344-351. 
By  Letter,  344,  345. 
In  Person,  345-351. 
Interesting  Promoters,  351-359. 
Pseudo-Promoters,  351,  352. 
Contracts  with,  352,  357-359. 
How  to  Find  Reliable  Promoters,  354-356. 
Promoter's  Compensation,  357,  358. 


INDEX.  521 

Promoters  and  Financiers  (C"h.  XXXVIII),  441^61. 
Successful  Promoters,  441,  442. 
Promoter's  Career,  44v?,  444. 
General  Promoting  Concerns,  444-456. 

Methods,  445-453. 

Demands  for  Money,  446-455. 
Cases  in  Point,  447-449,  450-456. 
Financing  Patents,  453-456. 
Professional  Promoters,  456-461. 

Origin,  457. 

Characteristic  Operations,  458-460. 
Fraudulent  Promoters,  459,  460. 

Cautions,  461. 
Promoters  and  Over-Capitalization,  247-251. 

Profits,  Legal  Aspect  of,  258-264,  327,  328. 
Promotion,  Agreement  for,  468-472. 

Essentials  for  Successful,  12,  13. 
Prospectus  and  Other  Papers  (Ch.  XXVI),  278-290. 
Function  of  Prospectus,  278. 
Promotion  without  Prospectus,  279,  280. 
Arrangement  of  Prospectus,  280. 
Expert  Aid  on  Prospectus,  281,  282. 

Cost,  281,  282. 
Printed  or  Typewritten,  282-284. 

General  Hints,  283,  284. 
Beginning  Prospectus,  285-287. 

Names  of  Managers,  285,  286. 
What  to  Include,  286-288. 
What  to  Omit,  288,  289. 
EfTective  Conclusion,  289,  290. 
Prospectus  and  Other  Papers  (Continued),  (Ch.  XXX'II),  291-302. 
Brevity,  291. 

Interpolated  Matter,  291,  292. 
Mehanical  Execution,  292,  293. 
Cost  of  Printing,  294. 
Accompanying  Letter,  295. 
Financial  Proposition,  295-297. 
Preliminary  Statement,  297,  298. 
Collateral  Papers,  298,  299. 
Presentation  of  Patents,  299-301. 
Presenting  a  Going  Concern,  301,  302. 
Expert  Reports,  302. 


522  INDEX. 

PROTECTION    OF    AN    ENTERPRISE    (Part    III),    118-162. 
Public  Presentation  (By  Circular  Letters),  (Ch.  XXXII),  360-375. 
Advantages  of  the  Method,  360,  370,  371. 
Methods,  361-374. 

Preparing  the  Letter,  361-364. 

Securing  Names  of  Investors,  364-370. 

Detailed  Method,  365-368. 

Suggestions,  371-374. 
Difficulties,  374,  375. 
Public     Presentation     (Newspaper     and     Magazine    Advertising), 

(Ch.    XXXIII),    376-388. 
Cost  of  General  Advertising,  376—384. 
Proportion  of  Failures,  379. 
Financial  Report,  380-382. 

Analysis,  382,  383. 
Local  Campaign,  384. 
Preparation  of  Advertising  Matter,  384-386. 

Facts  vs.  Opinions,  386. 

Competing  Statements,  386,  387. 

Evasion  of  Material  Points,  387,  388. 

Details,  388. 
Public     Presentation     (Newspaper    and     Magazine    Advertising — 

Continued),  (Ch.  XXXIV),  389-403. 
Best  Mediums,  389,  390. 
Financial  Agents,  390,  400,  401. 
Voluminous  Advertising,  391,  392. 

Cash  Buyers'  L^nion,  392. 
I'sual  Methods,  392-401. 

P"ollow-up  Letters,  395-398. 

Increasing  Prices  at  Intervals,  398-400. 

Employment  of  Agents,  400,  401. 
Sears,  Roebuck  &  Co.  Plan,  402. 

Q- 

Questions  for  Investor.     (See  Investor's  Questions.) 

R. 

Relative  Status  of   Undertaking,   Capital   and    Management    (Ch. 

V),  41-48. 
Permanent   Importance  of  Management,  41,  42. 


INDEX.  523 

Relative    Status    of     I'tKlortaking,    Capital    and    Maiiagcmcnt. — 

Continued. 
Fluctuating  Importance  of  Capital  and  the  Undertaking, 

42-45. 
Why  Capital  Usually  Dominates,  44-47. 
Capitalist's  Position,  44-47. 
Requisites  of  a  Successful  Enterprise  (Ch.  IV'),  27-40. 
A  Sound  Undertaking,  27-31. 

Investigation  of  Value,  29,  30. 
Sufficient  Capital,  31-34. 

Estimating  Amount  Required,  32,  33. 
Efficient  Management,  34-40. 

Advantage  in  Securing  Capital,  34,  35. 
Securing  Capable  Manager,  35-40. 

S. 

Secret  Processes  (Ch.  XIV),  143-148. 

Patents  vs.  Secret  Processes,  143-148. 

Cases  in  Point,  144-147. 
Considerations  Affecting  the  Matter,  146-148. 
Secret  Profits,  Promoters',  258-264,  327,  328. 

Methods  of  Securing,  262-264. 
Speculative  and  Non-Speculative  Enterprises  (Ch.  VIII),  66-74. 
Distinction,  66. 

Cases  in  Point,  67-74. 
Cotton  Mill,  67,  68. 
Mark  Twain's  Investment,  68-70. 
Type-setting  Machinery,  68,  69. 
Linotype,  69-71. 
Wireless  Telegraphy,  72-74. 
Marconi  Company,  73. 
SPECIAL  FEATURES  OF   PROMOTION    (Part   VI),  404-502. 
Speculative  Enterprises,  Capitalization  of,  233-240. 
Stock,  Corporate.     (See  Ch.  XLI.) 

Guaranteed.     (See  Ch.  XXXVI.) 

T. 

Title,  Investigation  of,  61,  62. 

Trade-Marks,  Trade-Names  and  Copyrights  (Ch.  XIII),  131-142. 

Registration,  131-133. 

Value  of  Trade-Marks,  133-137. 
Cases  in  Point,  133-137. 


524  INDEX. 

Trade-Marks,  Trade-Names  and  Copyrights. — Continued. 
Trade-Names,  137-141. 

The  Remington  Typewriter,  139-140. 
Copyrights,  140,  141. 

Procedure  to  Obtain,  141. 
Fees,  141. 
Trust  Fund  Guarantees  (Ch.  XXXV),  404-413. 
Term  as  Used  in  Promotion,  404. 
"Trust  Fund,"  Defined,  405-407. 
Criticism  of  Methods,  407-410. 
Plan  of  Large  Exploitation  Company,  410—412. 
Comparison  with  Usual  Plan,  412,  413. 
Twain,  Mark,  68-70. 

U. 

Underwriting  (Ch.  XXXVII),  430-440. 

Reasons  for  Underwriting,  430,  431. 
Where  Practicable,  431,  432. 
Two  Methods  in  Common  Use,  432. 
Compensation  for  Underwriting,  432-435. 
Essentials  of  Underwriting,  435,  436. 

Shipbuilding  Trust,  436. 
Underwriting  Agreement,  436-439. 

Advances,  438. 
When  Used,  440. 


\'alue  as  a  Basis  for  Capitalization  (Ch.  XVTI),  174-183. 
Legal  Requirements,  174,  175. 
Nominal  Value  of  Stock,  175,  176. 
Variation  between  Capitalization  and  Value,  176-178. 
As  Measure  of  Capitalization,  178-182. 

Case  in  Point,  178-182. 
Capitalization  of  a  Mining  Venture,  182. 
Classification  of  Capitalizations,  183. 
\'alue,  Capitalization  as  a  Measure  of,  167,  169-173. 
of  Inventions,  Testing,  102-108. 
of  Trade- .Marks,  133-137. 
Voting  Trusts,  489,  490. 


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